Thursday, May 19, 2016

The REAL Origin of Money

WARNING: Gold bugs beware. Existential crisis ahead:

Wednesday, May 18, 2016

Close But No Cigar

You’re nearly there Tan Sri, just a little bit further (excerpt; emphasis mine):

The alchemy of money

When money was fully backed by gold, money was tied to real goods. But when paper currency was invented, money became a promisory note, first of the state – fiat money, supported by the power to impose taxes to repay that debt, and today, bank-created money, which is backed only by the assets and equity of the bank. The power to create “paper” money is truly alchemy – since promises by either the state or the banks can go on almost forever, until the trust runs out.

Tuesday, May 10, 2016

When Investment Isn’t Investment

From VoxEU (excerpt):

The ‘real’ explanation of the Feldstein-Horioka puzzle – and what it means
Nicholas Ford, Charles Yuji Horioka

…The nature of the Feldstein-Horioka puzzle concerns the mobility of the world’s supply of capital. There is a presumption amongst economists that financial markets can rapidly, and nearly without cost, divert ‘financial capital’ from one country to another. This being the case, it would be expected that savings should be diverted from wherever they occur to where the best investment opportunities are by agents seeking to maximise returns. There is no reason the best investment opportunities should be in a savers’ home country; as a consequence, according to this reasoning, the levels of investment and saving should not be correlated across countries. However, Feldstein and Horioka (1980) found that this is not the case and that most incremental saving is in fact invested in the country in which it occurs. The puzzle is to try to understand why this should be the case….

To GDP Or Not To GDP

Quick one, highlighting a few articles on whether GDP remains an appropriate measure for human welfare.

First from Sir Charles Bean (excerpt):

Measuring the Value of Free

...One particular challenge for economic measurement stems from the fact that an increasing share of consumption comprises digital products delivered at a zero price or funded through alternative means, such as advertising. While free virtual goods clearly have value to consumers, they are entirely excluded from GDP, in accordance with internationally accepted statistical standards. As a result, our measurements may not be capturing a growing share of economic activity....

Wednesday, May 4, 2016

Effective Exchange Rate Indexes: April 2016 Update

The NEER and REER page has been updated.


The bounce up from January lows continued in April, with the nominal broad index gaining 2.74 points to 90.77 (p) and the real broad index gaining 3.1 points to 93.33 (p) in April. The Ringgit advanced against the currencies of all of Malaysia’s major trading partners, but in particular the US Dollar bloc (USD, CNY, HKD, PHP and VND) by around 3.8%-4.2% during the month. Also of note is the gain against the GBP of around 3.8%, largely due to uncertainty over the June referendum.



  1. Indexes have been updated to April 2016, with revisions for January to March 2016
  2. CPI deflators have been updated for March/April 2016

Monday, April 25, 2016

Never Reason From A Price Change: Inflation Edition

The quote comes from Scott Sumner, and I’m not using it in the original sense (identifying causality in a supply-demand equilibrium), but there’s a certain truth to it when applied to monetary policy.

There’s a lot of speculation in the market right now that Bank Negara will cut interest rates in the next two meetings of the MPC, largely because (1) political pressure and (2) the coming drop in inflation. I think (1) is nonsense (I see no evidence of it, nor have I heard anything), and (2) is mistaken.

This post is about point 2.

Tuesday, April 19, 2016

The Difference Between Quantitative Easing and Helicopter Money

I just read a report from a major international bank this morning(who shall remain nameless) that claimed helicopter money was already being implemented in a few countries, herein defined as monetary financing of fiscal deficits.

This is wrong, and they’re confusing quantitative easing (QE) with helicopter money (HM). The difference between the two is more than just semantics, despite the superficial similarities between the two in largely involving central bank buying of government bonds.

The easiest way to show this is via an example. Let’s say the private sector has $100. The government wishes to borrow $50 to finance its spending. So the private sector buys $50 worth of government bonds, the proceeds from which the government uses to spend on goods and services. But that money goes back to the private sector, so the asset side of the private sector balance sheet now reads $100 cash and $50 in bonds. The private sector balance sheet has expanded, as has the government’s.

Now that we’ve set the stage, we can work out how QE and HM affects the economy.

Wednesday, April 6, 2016

Proton in Perspective: Industrial Policy Gone Wrong

Proton has hit the headlines again (excerpt):

Proton must ‘graduate’ from govt protection, says Mustapa

PETALING JAYA: Proton needs to “graduate” from Government protection, says International Trade and Industry Minister Datuk Mustapa Mohamed (pic).

In a statement on Friday, Mustapa said that the Government could not continuously protect heavy industries, including the automotive sector, noting that although other countries such as Japan and South Korea have protected their automotive industry, these measures were short- and medium-term in nature, and were eventually abolished.

“Proton, which is our national car project, needs to graduate from this protection,” he said.

Tuesday, April 5, 2016

Effective Exchange Rate Indexes: March 2016 Update

The NEER and REER page has been updated.


The Ringgit continued to gain ground in both the broad and narrow indexes, driven by advances against the USD, CNY, HKD and GBP, although the pace of advance slowed. The broad nominal index rose 1.22 points to 88.03 (p), while the broad real index rose 1.41 points to 89.79 (p).



  1. Indexes have been updated to March 2016, with revisions for January and February 2016
  2. CPI deflators have been updated for February/March 2016
  3. Both real and nominal ASEAN indexes have been completely revised, due to a spreadsheet error

Thursday, March 24, 2016

MOF Smackdown…Of Me

Mea Culpa!

Last week, the government tabled a supplmentary supply bill in Parliament, seeking retrospective approval for RM3.3 billion extra in spending allocation for 2015. The usual headlines ensued.

My impression had always been that supplementary bills of this sort (and we’ve had one every single year that I can recall) were additive to the original annual budget estimates i.e. the government overspent the previous year, and had to seek Parliamentary approval for the overspend. I didn’t really have a problem with this, because MOF has also always been pretty conservative with their revenue estimates. On occasion the extra collection can be pretty large – in 2011 for example, they underestimated actual revenue by 11.2%(!).

In coversation with a senior MOF official yesterday (actually, it was more of a polite scolding), it turns out I was wrong.

We’re still looking at a case of overspending, but the supplementary bills are not necessarily an addition to the original budget. It turns out they only cover cases where some ministries have overspent their allocation; but as some ministries also don’t fully utilise theirs, the impact on the aggregate budget isn’t necessarily the same as the figure in the supplementary bill. We could for instance have a situation where even a largish supplementary bill might not imply an increase in actual versus planned government outlays.

I’ll probably need to reach out to MOF to clarify the situation further (for example the implication that parliamentary budget allocation approval is at the ministry/agency level), but it looks like the supplmentary bills aren’t exactly what they seem.

So, humble pie time. Mea Culpa!

Tuesday, March 15, 2016

Thinking About Labour Markets: Partial Equilibrium Fallacies

I think by this time we all know that empirically, a minimum wage doesn’t seem to have the negative effect on employment that conventional economic analysis says it does. The reason for that is the Econ 101 standby of analysing policy changes based on ceteris paribus – a partial equilibrium approach. Holding everything constant and changing just one variable is a very useful way of thinking about economic issues, but it risks missing out on real world implications when you forget that economic systems are, in fact, actually systems.

Thursday, March 10, 2016

Changing The Reserve Ratio ≠ Changing Monetary Policy

Or, Part Three of Why I Feel Snarky This Week

A few weeks back, Bank Negara cut the Malaysian statutory reserve ratio by 0.50%, and the People’s Bank of China did the same thing last week. Most of the commentary was along the lines of “easing monetary policy” and “adding to stimulus” and “boosting lending and investment”.

That’s a load of bull.

I’ve had to explain this multiple times over the past few weeks, so rather than having to do it all again, I thought I might as well write it out.