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.

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…

 

 

Auditor-General can do a lot on 1MDB


November 16, 2014

Auditor-General can do a lot on 1MDB

by P.Gunasegeram@www.malaysiakini.com

AmbrinQUESTION TIME: Perhaps – perhaps – the Auditor-General may not be able to or have to audit the accounts of scandal-ridden national strategic investment fund 1Malaysia Development Bhd or 1MDB. But surely he can make an assessment of the impact of 1MDB on government finances and the threats it might pose. And more.

It’s easy for Auditor-General Ambrin Buang to throw his hands up in the air and say there is no reason for him to audit 1MDB because it has already been audited by a big four accounting firm – Deloitte.

To quote him: “Why are we not auditing 1MDB? My answer is that its accounts have already been audited by one of the ‘big four’,” Ambrin told a town hall meeting session with the media on Wednesday on the third series of the 2013 Auditor-General’s Report that was released on Monday.

“So, there is no reason why we should come in again,” he said, responding to media questions on why it had not taken any audit action on the controversial 1MDB. Auditing financial statements is a very labourious examination.”

Indeed it is. But does that mean that the auditor-general sits around and twiddles his thumbs while a major scandal involving a company fully owned by the government’s Minister of Finance Inc unfolds right before his eyes? Surely he has been reading the newspapers.

Don’t highly questionable things like raising funds willy-nilly, underpricing bonds while paying too much for assets, paying high interest rates, keeping billions of ringgit in low yielding deposits while raising even more funds and paying a fortune in fees to Goldman Sachs not pique the auditor-general’s curiosity?

Let’s put down some facts first about 1MDB for the benefit of the auditor-general. It would not have made any profits since its inception in 2009. If not for revaluation of government property sold cheaply to it, its losses to date would have been RM5 billion as at end March 2014.

Najib and 1MDB
On the liability side, it is funded by RM1 billion in share capital by the Minister of Finance Inc. But its borrowings as of March 31, 2014 amount to a massive RM42 billion, 42 times the share capital.

The gearing ratio, the percentage of debt to shareholders funds or equity of RM1.7 billion, is a massive 24 to 20 percent which could be among the largest if not the largest for any large company in Malaysia. In the private sector, that kind of gearing will be considered unbearable.

To cap it all, it is doing very little with that kind of borrowings. It has bought power assets worth some RM10.5 billion for which it took a loan despite there being considerable liquidity within the firm. Even if we subtract that RM10.5 billion from RM42 billion, some RM31.5 billion is substantially unaccounted for.

Available for sale assets, a vague term for financial assets which are held for sale and for which there may be no provision for diminution in value, comes up to a massive RM13.4 billion, including RM7.7 billion tied up in Cayman Islands in a mysterious segregated portfolio company which no one knows anything about.

Apart from that, there are various cash or near cash assets which account for a further RM9.1 billion. Add these up and the total amount of assets doing practically nothing comes up to a massive RM22.5 billion. Why keep these assets in near cash and then borrow some more?

In the first few years alone of its life, after stripping out revaluation gains, it is obvious that 1MDB has not been able to earn more than the interest on borrowings as shown by the RM5 billion losses. Why? And why is it continuing to borrow? And can it ever get assets that will earn significantly more than the interest costs?

Loan mispricing

What about 1MDB’s loan mispricing, which is already over RM4 billion and could eventually amount to RM7 billion or more if new loans were made on the same basis? And what about the massive fees paid to Goldman Sachs of over RM500 million for arranging some loans?

Surely the Auditor-General can do something about these. After all, the Minister of Finance Inc, is a government company, no different from any company owned by a ministry. 1MDB is that company’s wholly owned subsidiary. Surely the auditor-general has every right to probe any government company which poses a threat to government finances.

Remember that the government originally said that it guaranteed explicitly only RM5.8 billion of loans and denied there was any letter of support for anything more. But now after the support letter came out in the press, it now concedes there was indeed such a letter for a further RM10 billion.

How many more letters of support could there be for 1MDB? And what about other government companies and bodies? Legal opinion is that the letters of support are in substance no different from guarantees and that the government will have to pay up in the event of default by 1MDB. Surely this is an area which concerns the auditor-general and the amount of contingent liabilities the government has to bear.

The Auditor-General plays a role as the watchdog of the government and the public. It is his obligation to publicly highlight potential threats to government finances and to make recommendations to avoid them, and probe them if need be. He has done this commendably well for other government departments and bodies. Why should any exemption be given for 1MDB? What’s so special about 1MDB?

The Avaricious, the Corrupt and the Uncaring


November 15, 2014

The Avaricious, the Corrupt and the Uncaring

by Balan Moses

Balan-Moses-ENG NEW-1THE mudflow and landslides that killed five in Cameron Highlands last Wednesday and caused untold misery to scores of others is a tragedy in more ways than one.

The human toll and damage notwithstanding, the price the public had to pay due to official malaise was astronomical. People who had been living their lives peaceably and in harmony with the environment were rudely awakened by mudflows and landslides caused by extensive land clearing and poor management of the same.

They had thought that last October 23rd’s incident where a mudflow had tore up houses and other buildings and tossed cars about was the last of this intrusion into their lives.But they were sadly mistaken as events last week amply proved.

CAMERON HIGHLANDSIllegal Land Clearing in Cameron Highlands

Thirteen months later a rural community that was minding its own business was shaken to its roots by the bitter fruits of the labour of the corrupt, the avaricious, the careless and the uncaring.

While many businessmen will generally do anything they need for the extra ringgit (as can be seen in the case of greedy people in the Cameron Highlands issue), I take exception to the continued malaise of government – in this case, the relevant federal authorities, the state government and its related agencies and the local authority  – in the matter.

The proliferation of farming activities, both legal and illegal, has been ongoing in the former hill station for decades with little being done to monitor such activities.If something had been done at the genesis of the problem, the people of Cameron Highlands, more specifically those in the Ringlet, Bertam Valley, Kampung Raja and surrounding areas, would not have been caught in this most distressing situation.

The rivers became silted over the years, the temperature rose, the beauty of pristine Camerons Highlands was desecrated by vegetable farms.But no one really cared. The businessmen continued with the expansion of their farms and the powers that be with the nominal supervision of such activities.

Last October, there was general umbrage in Malaysia, especially in government circles, over the mudflows amid promises that something would be done to ensure that this would not recur.

But they could not exercise authority over the perpetrators of such environmental carnage. Neither could they control nature, which did what came naturally to it, and moved tonnes of mud down an impossibly narrow and shallow river into  homes and habitation.

At this point, the northern Malay saying comes to mind. Pi Mai, Pi Mai. Dok Tang Tu.’So what happens now? Enough of finger-pointing, I say. It has got us nowhere. The only thing that can be achieved with this exercise is placing fault with those responsible. It cannot change the situation unless people are shocked out of their inertia and into action.

I am amazed that Government and elected officials are telling us the same thing that they did last year when a similar occurrence took place.Statements are now being made that should put the fear of God in those engaged in illegal land clearing. But will they work?

To be fair, I do not really know. The government appears to be well-intentioned in making these statements as it did the last time around. Only time will tell.

I believe the key to a change in the situation in careful and accurate mapping of the entire Cameron Highlands area by the local authority with the necessary equipment to perform the task in a particularly difficult terrain.

Helicopters may be the answer to this long and tedious task on mapping out areas of legal activity and otherwise. In this respect, I am astounded by statements alluding to the belief that the authorities may not have known the extent of illegal clearings in the Camerons.

This is unbelievable. It may be part of the Malaysians malady of government officials sometimes not seeing and acting on problems that overtly affect the people. One thing is sure: We need dedicated and conscientious officials who are willing to go the extra mile to keep our hills safe for future generations.

I believe I speak for all Malaysians when I say that we are unwilling to see another tragedy anytime down the road. We must act now. There is no other choice.

http://news.abnxcess.com/2014/11/the-avaricious-the-careless-the-corrupt-and-the-uncaring/