Rock Bottom Economics


November 26, 2014

Rock Bottom Economics

by Paul Krugman@www.nytimes.com

KrugmanSIX years ago, the Federal Reserve hit rock bottom. It had been cutting the federal funds rate, the interest rate it uses to steer the economy, more or less frantically in an unsuccessful attempt to get ahead of the recession and financial crisis.

But, it eventually reached the point where it could cut no more, because interest rates can’t go below zero. On December 16, 2008, the Fed set its interest target between 0 and 0.25 per cent, where it remains to this day.

The fact that we’ve spent six years at the so-called zero lower bound is amazing and depressing. What’s even more amazing and depressing, if you ask me, is how slow our economic discourse has been to catch up with the new reality. Everything changes when the economy is at rock bottom — or, to use the term of art, in a liquidity trap (don’t ask). But for the longest time, nobody with the power to shape policy would believe it.

What do I mean by saying everything changes? As I wrote way back when, in a rock-bottom economy, “the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly”. Government spending doesn’t compete with private investment — it actually promotes business spending.

Central bankers, who normally cultivate an image as stern inflation-fighters, need to do the exact opposite, convincing markets and investors that they will push inflation up. “Structural reform”, which usually means making it easier to cut wages, is more likely to destroy jobs than create them.

This may all sound wild and radical, but it isn’t. In fact, it’s what mainstream economic analysis says will happen once interest rates hit zero. And, it’s also what history tells us. If you paid attention to the lessons of post-bubble Japan or, for that matter the United States economy in the 1930s, you were more or less ready for the looking-glass world of economic policy we’ve lived in since 2008.

But as I said, nobody would believe it. By and large, policymakers and “Very Serious People”, in general, went with gut feelings rather than careful economic analysis. Yes, they sometimes found credentialed economists to back their positions, but they used these economists the way a drunkard uses a lamppost: for support, not illumination. And, what the guts of these serious people have told them, year after year, was to fear — and do — exactly the wrong things.

Thus, we were told again and again that budget deficits were our most pressing economic problem, that interest rates would soar any day now, unless we imposed harsh fiscal austerity. I could have told you this was foolish and, in fact, I did, and sure enough, the predicted interest rate spike never happened — but demands that we cut government spending now, now, now have cost millions of jobs and deeply damaged our infrastructure.

We were also told repeatedly that printing money — not what the Fed was actually doing, but never mind — would lead to “currency debasement and inflation”. The Fed, to its credit, stood up to this pressure, but other central banks didn’t. The European Central Bank, in particular, raised rates in 2011 to head off a nonexistent inflationary threat. It eventually reversed course, but has never gotten things back on track. At this point, European inflation is far below the official target of two per cent and the Continent is flirting with outright deflation.

But are these bad calls just water under the bridge? Isn’t the era of rock-bottom economics just about over? Don’t count on it.

It’s true that with the US unemployment rate dropping, most analysts expect the Fed to raise interest rates some time next year. But, inflation is low, wages are weak and the Fed seems to realise that raising rates too soon would be disastrous. Meanwhile, Europe looks further than ever from economic lift-off, while Japan is struggling to escape from deflation. Oh, and China, which is starting to remind some of us of Japan in the late 1980s, could join the rock-bottom club sooner than you think.

So, the counterintuitive realities of economic policy at the zero lower bound are likely to remain relevant for a long time to come, which makes it crucial that influential people understand those realities. Unfortunately, too many still don’t; one of the most striking aspects of economic debate in recent years has been the extent to which those whose economic doctrines have failed the reality test refuse to admit error, let alone learn from it.

The intellectual leaders of the new majority in Congress insist that we’re living in an Ayn Rand novel; German officials insist that the problem is that debtors haven’t suffered enough.

This bodes ill for the future. What people in power don’t know or, worse, what they think they know but isn’t so, can very definitely hurt us.

–also published in http://www.nst.com.my

On 2015 Selangor Budget: MB Azmin Ali breaks new ground


November 25, 2014

MB Azmin Ali breaks new ground in Maiden Budget for Selangor

Commentary
by the Malaysian Insider@www.themalaysianinsider.com

Azmin AliIt might not seem much, but Selangor Menteri Besar Mohamed Azmin Ali broke new ground today when he proposed a RM200,000 allocation each for people-friendly programmes in opposition-held seats in the country’s wealthiest state.

His own Pakatan Rakyat (PR) assemblymen will each get RM700,000 for similar activities under the Program Mesra Rakyat as part of the move to improve local representative services to the people.

“I hope the federal government will get a clear message from Penang and Selangor that we respect the role of opposition members in the assemblies. They should reciprocate and respect the roles of MPs at the federal level,” Azmin said after tabling the state’s Budget 2015 proposals today.

Aside from Selangor, Penang provides allocations of RM40,000 to each of its opposition members for small-scale development projects. It really is not the amount that matters. It is the fact that a government realises that even their political foes represent the people and public funds are for all and not just for those who vote in the government.

For too long, Malaysians have been used to seeing a federal government that only allocates funds for its MPs while others get help through a “federal office”.

And public projects using public funds are labelled as a Barisan Nasional (BN) project – considering the fact that it is the only government known to most Malaysians throughout their lives since Merdeka.

What does it say then that in the past two elections, more Malaysians reject the BN candidate in favour of a PR candidate despite the plethora of BN projects from roads to hospitals to schools and other infrastructure.

What does it say then that it BN appears to punish those who vote in their foes while politicians such as Azmin and Lim Guan Eng have taken the high road and provide some funds for their respective state’s opposition BN lawmakers?

New politics? Populism? Or really, a government that realises the people should not suffer for the choice they have made. That the electorate will evaluate politicians by how sincere they are through the years rather than just during election campaigns.

What Azmin is doing for his Budget 2015 proposals for Selangor – be it a car for the state opposition leader and the proposed allocations for all lawmakers – is a step that must be praised.

The election campaign is over and he has whatever remains of PR’s mandate to run the state and provide for the people of Selangor, no matter whether they are PR or BN supporters.

Because, his government is a government of the people, by the people and for the people of Selangor. And all the funds he allocates are public funds, and not his government’s money.

Putrajaya can learn something from Azmin Ali and Lim Guan Eng, that it takes more than just slapping a label on a project to remind people which government is doing the job or that they should be grateful for the project. Fact is, it is the government that should be grateful it is elected to run a state or a country, and not the people.

Kudos to Azmin, for showing that politics is not a zero sum game and that rakyat’s interest always comes first. – November 24, 2014.

President Jokowi Gets on with His Job


November 24, 2014

President Jokowi Gets on with His Job: No Talk, Just Action

tansri-sherif

by Tan Sri Mohd Sheriff bin Mohd Kassim

Jokowi has barely stepped into office as the new President of Indonesia and he is already making waves.

He is coming into world prominence not by grabbing the microphone to makeGovernor of Jakarta thunderous speeches about race and religion or picking on the ethnic Chinese businessmen, foreigners and  western imperialists  as scapegoats for his country’s endemic corruption, inefficiencies and economic backwardness. Instead, he is getting admiration at home and abroad  by simply doing what his people expect from him –just be his humble self  and get on with the job he was elected for.

His bold move to cut down on  subsidies and make the people pay more for fuel  will not endear him to millions of  poor Indonesians but it is precisely the kind of action that is needed to show he means business in his promise to strengthen the economy and find the money to build roads, schools and hospitals for the masses. It is also a warning sign that he is not afraid to take the unpopular measures to stop the wastages and  abuses that have plagued this resource rich country for decades . A few years down the road, when the man on the street sees signs of progress all around him, he will thank his President for being  politically honest in doing what needs to be done.

The Muslim world can also look up to him to lead in the path of moderation and pragmatism.His brave statements condemning Islamic terrorism and extremism during the election campaign shows  that he is one who is unafraid to speak his mind for fear of losing  votes. Nor was he deterred when Islamic groups tried to stop him from appointing an ethnic Chinese to be Governor of Jakarta (above right). The silent majority will be cheering him for standing up to the racists and religious bigots and simply doing what is right.

I will not be surprised that in the near future, he will act on the blasphemy laws , which Amnesty International  has higlighted for the several cases of injustice inflicted on  non-Sunni religious minorities. Being a former businessman himself, Jokowi knows that Indonesia cannot let religious extremism and unfair Islamic  laws to fester because it will have a negative impact on the country’s investment climate. Without large doses of local and foreign investment, Indonesia cannot progress at the rate Jokowi has in mind.

Jokowi Widodo

Jokowi and his wife travelled to Singapore recently on economy class ticket to attend his son’s graduation from the Anglo-Chinese International University . By this simple act of self-discipline in not abusing his position to use his presidential plane for a private visit, he has sent volumes of signal to his countrymen that he is going  to be an honest and clean president. Cynics may dismiss this simple act of humility  as political showmanship but , to the ordinary millions of poor people who still remember the luxurious grandeur of their past presidents and their first ladies , they thank God that Indonesia is now changing for the better.

All the best to Indonesian President Jokowi as he leads the country with the largest Muslim population in the world towards economic progress and social stability and by so doing, make himself as an example for other Muslim leaders  to follow.

Horrendous Devastation of Cameron Highlands due to Plainly Ugly Greed


November 23, 2014

Horrendous Devastation of Cameron Highlands due to Plainly Ugly Greed

by Tunku A  Aziz@www.nst.com.my

Sultan of PahangIF a picture, as the saying goes, is worth a thousand words, then the New Straits Times’ startlingly brutal depiction of the horrendous devastation of Cameron Highlands merits at least ten thousand drops of tears of anger, frustration and despair because those entrusted to protect our precious natural heritage have betrayed our trust.

 The wanton destruction of the environment and the disregard for human life all bear the hallmarks of human greed; we were jolted out of our complacency and forced to see corruption in all its ugliness.

No longer do we think that corruption is none of our business; no longer do we dare say, “Why all the fuss when only two parties are involved, the giver and the taker?” And no longer will we be able to dismiss the fact that there are victims whenever corruption rears its head.

The Cameron Highlands tragedy, both in human and environmental terms, has turned corruption on its head. The pristine hill station of the 1960s and 1970s is now a distant memory. My annual Christmas break was usually spent with my family in Cameron Highlands, with its promise of bracing mountain air and country walks in quiet, salubrious surroundings. This yearly ritual, sadly, started to lose its appeal with uncontrolled development that rapidly changed the character of the place.

Overnight, Cameron Highlands, the country’s premier Little England that once had trout in its mountain streams and rose bushes in every garden, took on an ominously grotesque aspect. It was transformed into a noisy, gaudy and boisterous bazaar that could give Petaling Street a good run for its money. I have not been back there for more than thirty years, preferring to treasure in the deep recesses of my memory the Cameron Highlands that I once knew and loved.

The recent tragedy has, as expected, produced a slew of responses, ranging from the sublime to the ridiculous. In my long and eventful existence, I have heard a few ideas that are clearly beyond the pale, but nothing has quite prepared me for the proposal, that I suppose, could only have been conceived in the cluttered mind of a politician: to plant a million trees over a three-year period as part of a programme to rehabilitate Cameron Highlands that many believe to have been damaged beyond redemption.

I say with all due deference to the Natural Resources and Environment Minister, Datuk Seri G.palanivel Palanivel, that we are not talking about transplanting hair on a vain politician’s head — a painful enough process as some who have resorted to this treatment will tell you.

A million trees? The mind boggles at the very idea. Audacious and out of the box, yes. But is it doable and at what cost? All this leads me to ask why, with all the empirical evidence staring them in the face, didn’t our enforcement officers do what they were employed to do — enforce the law, plain and simple?

There were quietly whispered hints of “interference from above”, which puzzles me quite a bit because the “Yellow Letters”, according to the sultan of Pahang himself, did not come from the palace because, for one thing, they were not written on the official palace note paper and did not bear his signature. Who is it then that enforcement officers were pointing the finger at?

Whoever the exalted personage might be, he must be exposed because it is vitally important to show our people that there is one law for all. The Sultan’s standing and reputation, no less, must be protected and not to be trifled with.

The drama that unfolded on the slippery slopes and the silted valleys of Cameron Highlands has brought us face to face with the debilitating effects of corruption on society.

The reality on the ground is not a pretty sight. It is corruption writ large: if that does not turn our stomachs, then I suggest we deserve more of the same. The time for whinging is over. It is about time we took ownership of the fight against corruption and its attendant problems. I do not think it would be wise to leave such an important matter as fighting corruption especially to politicians. There is no need for elaboration.

Pahang, of course, is not alone of the Malaysian states that can claim a long history of illegal logging and land clearing. Stories, both anecdotal and factual, of corruption in forestry and land offices up and down the country are legion. Sabah and Sarawak occupy top spots in the forestry corruption league table. But, that is a story for another time. It is refreshing to hear the new chief minister of Sarawak, Tan Sri Adenan Satem, warning illegal loggers that stern action would be taken against them and that he would not tolerate corruption in his administration. I am not, in a manner of speaking, about to put the champagne on ice, and neither am I holding my breath. I do not know of any head of government anywhere in the world singing his heart out in praise of corruption. All politicians would have us believe that they are part of the solution. I should like to see the colour of their money first.

Returning to Pahang, I wonder why enforcement agencies who are paid to prevent these breaches of the law have allowed the situation to get so wildly out of control? The short answer, on the evidence that has long been in the public domain, is that the State of Pahang has been ‘captured’ by influential, almost always, titled crooks with loads of money, howsoever acquired, to seduce greedy and corrupt public officers. If they had only carried out their duties honesty, a great deal of the damage could have been prevented, and the good minister of one million trees would have saved himself a few blushes, and the treasury a lot of money.

 Royal Commission should be set up now to inquire into the state of corruption in the country as a whole. It is in the country’s interest to gauge accurately the true reading of the nation’s corruption barometer, so that we would not be wasting time and money treating symptoms because we have no clear idea of the root causes of corruption in national life.

With Bad Economic News, Abe’s Magic Seems to Evaporate


November 21, 2014

Japan: Between Monetary Stimulus and Fiscal Austerity

Chairman Lodin, come clean on 1MDB, figures don’t lie


November 19, 2014

Chairman Lodin, come clean on 1MDB, figures don’t lie

by Kharie Hishyam @www.kinibiz.com

Like a toddler learning to walk, controversial state investment fund 1Malaysia Development Bhd is slowly coming out to refute its critics. But proper explanations are yet to come and its latest public statement only spawns more questions.

Amid the burning fire of controversy over its questionable dealings, state investment fund 1Malaysia Development Bhd (1MDB) has come out and “assured” Malaysians that its investments were carefully made and professionally managed. Alas, the same characteristic of being professionally managed can also probably be said about many of the 23 public-listed companies in Bursa Malaysia’s PN17 list. But what’s in labels anyway?

In the corporate world results, not reputation, is what delivers and one wonders why 1MDB, with all the professionalism within its managerial ranks, has bled losses year after year with only paper gains papering over the red ink.

lodin-wok-kamaruddinA corporate figure once said that numbers tell a thousand stories and it is in 1MDB’s numbers that the story contradicts what its chairman, Lodin Wok Kamaruddin, said about 1MDB’s investments.

So what had 1MDB so prudently invested in? According to its audited accounts, 1MDB invested a total of RM13.4 billion for the financial year ended March 2014 (FY14) in various places globally. This figure includes the RM7.7 billion parked in a structured investment company called a Segregated Portfolio Company (SPC) based in the Cayman Islands, managed by Hong Kong-based Bridge Partners.

And for these investments, 1MDB gained dividend income of RM437 million, which represents a paltry return of 3.26% on its investments. Considering the point that 1MDB could have parked the money in fixed deposit or government bonds and still get similar return — with an added bonus of less foreign exchange risk — it begs the question of why 1MDB bothered to go overseas in the first place.

Of course there is an even uglier side to the investment story: 1MDB’s audited accounts reveal that the investment fund is earning a mere 0.68% interest on its cash pile of nearly RM4 billion.

On the other side of the coin is that 1MDB’s finance costs or interest rates range from roughly 5% up to as high as 18% per annum.In effect, 1MDB is earning much less with its money compared to how much it is paying to have that money in its coffers. Worse, a big chunk of its money is left idle after paying so much to borrow the money in the first place, earning next to nothing in interest.

Why? Simple logic dictates that to make profit, capital must be put to work such that it earns more money than it costs to acquire the capital in the first place. That’s how you earn profit.

1MDBLeaving the capital idle definitely does not qualify as “investing”, unless having idle cash qualifies as investment (a poor one if you have loan repayments to meet). Why incur borrowing costs for nothing?

No wonder 1MDB is finding it difficult to service its loan commitments. Speaking of which Lodin stated that the investment fund believes it can meet its financial commitments.

“Some of the loans are long-term in nature but we believe this financial commitment can be met,” Lodin was reported as saying by Bernama, adding that 1MDB is looking to restructure its short-term loans to match its longer-term investments. “We are also in the process of adding and unlocking value to the assets that we have acquired.”

Najib and 1MDB

Recall that 1MDB already extended its RM5.5 billion bridging loan, originally part of a RM6.2 billion loan from Maybank Investment Bank in 2012, multiple times, even delaying its power assets listing due to negotiations on its debt obligations.

Now this begs yet another question: why borrow on such short horizons if the capital is intended for long-term investments? Would it not make more sense to match the repayment timeline with when the returns on investment are expected to flow in?

And unlocking value to the assets 1MDB had acquired, of course, would not be too difficult. Its properties were acquired cheap from the government, after all, and from there it is simply a matter of bringing valuations up to market benchmarks.

As for its power assets, KiniBiz had previously examined why 1MDB grossly overpaid for them, even borrowing money to do so despite having much cash lying around. Now is this prudent investing as 1MDB Chairman Lodin so generously claimed? Hardly. Numbers don’t lie and in 1MDB’s case, red ink remains red however you call it otherwise.

Perhaps 1MDB is revolutionising investment before our very eyes. Maybe there is a deeper wisdom to its strange madness of borrowing at high cost and making low-return investments.

Or maybe, just maybe, 1MDB simply made poor investment choices and consequently lost some RM5 billion over the past few financial years bar paper gains from revaluing its properties.

In which case what 1MDB seems to be saying right now fits right into the first part of the Kübler-Ross’ five stages of grief: denial. And we have not even talked about its losses of up to RM4 billion from its bond mispricing yet…