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.

Summary

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).

01_indexes

Changelog:

  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.

Wednesday, March 9, 2016

Exchange Rates Are Relative Prices: China Edition

Or Part Two: The Real Reason Why I Feel Snarky This Week

Last week, an article by Prof Xiao Geng and our very own Tan Sri Andrew Sheng appeared on Project Syndicate (excerpt):
China’s Lonely Fight Against Deflation
…the current battle over the renminbi’s exchange rate reflects a tension between the interests of the “financial engineers” (such as the managers of dollar-based hedge funds) and the “real engineers” (Chinese policymakers).

Foreign-exchange markets are, in theory, zero-sum games: the buyer’s loss is the seller’s gain, and vice versa. Financial engineers love speculating on these markets, because transaction costs are very low and leveraged naked shorts are allowed, without the need to hedge an underlying asset. The exchange rate, however, is an asset price that has huge economic spillovers, because it affects real trade and direct-investment flows....
This is a mix of a witch-hunt, denial of economic theory and reality, flawed analysis, and historical revisionism. It's perhaps a blessing (and telling) that this appeared under the business and finance section, and not under economics.

Monday, March 7, 2016

Levels and Growth: The Twain Are Not The Same

I promised myself I will not be snarky this week.

I will not be snarky this week.

I will not be snarky this week.

Unfortunately, this week, I have a lot to be snarky about.

Take this Star article published over the weekend. Please.

I will not be snarky this week.

Ok, no more jokes. Deep breath, start again (excerpt; emphasis added).
A slowing Malaysian economy

PETALING JAYA: Businesses and consumers remain wary of the economic outlook, judging from the money supply gauges of M3, also known as broad money, and M1, a narrower definition, used to measure the amount of money circulating in the economy. What is interesting to note is that M3 has shrunk by more than 86% over a span of four years....
For M3 to decline by 86%, would require every single current account, savings deposit and fixed deposit to be withdrawn from the banking system (and you'd still have a chunk of change left over). Which isn't physically possible, because physical notes and coins only form about 5% of M3. There simply isn't enough cash in the system to handle that magnitude of decline. What he's really trying to say of course is that the growth of M3, not the level of M3, has shrunk. He's confusing growth rates with levels, and confusing the reader at the same time.

To be fair to Mr Ng, in my experience that kind of mistake is terribly common among Malaysians. I come across it way too often, both at work and in the local media. Another common mistake: stock-flow confusion, like comparing an individual's wealth or a corporate balance sheet to a country's GDP (though this error is common in other places too).

I don't know if its a flaw in the way math is taught in the Malaysian school system, or an unfamiliarity with the nuances of the English language. Either way, it's the sort of pesky little detail that can jeopardise the credibility of a piece, and the point that the author is trying to make.

Yes, I'm anal about things like this, but we live in an open, globalised world. Paying attention to details matters.

Wednesday, March 2, 2016

The Consumer Price Index: Updated and Revised



In case you missed it, last month’s CPI numbers from DOS came with some changes.

First, the basket weights and components were updated to reflect 2014’s Household Expenditure Survey. This included adding 32 items, and removing 12. Weight changes were also made – as I suspected might happen, the drop in crude oil prices resulted in a reduced weighting for transport costs. Utilities costs (rent, water, electricity and gas) saw the biggest increase in weighting.

Second, the approach that DOS had taken previously was to rebase the CPI series to the new base year (2015 in this case). Instead, this time they’ve added to their methodological arsenal by chain-linking the new series to the old 2010 series. Essentially, they’ve saved researchers a lot of time and grief by splicing the new and old series together, so we don’t have to.

Effective Exchange Rate Indexes: February 2016 Update

The NEER and REER page has been updated.

Summary
All indexes showed gains during the month, with the Broad NEER gaining 2.3 points to 86.81 (p), and the Broad REER gaining 2.5 points to 88.12 (p). The Ringgit recorded gains against all index component currencies in February. On a trade weighted basis, the biggest factors contributing to the increase in the indexes were gains against the CNY, USD, SGD and KRW.

Changelog:

  1. All indexes have been updated to February 2016, with revisions from October 2015 onwards
  2. Trade weights have been updated for the 4Q2015 onwards
  3. CPI deflators have been updated for all countries up to December 2015, with many countries up to January 2016

Monday, February 22, 2016

Mexican Two Step

Last week, Banco de Mexico and the Mexican government delivered a double whammy to the financial markets (excerpt):

Mexico Battles Emerging-Market Bears With Surprise Peso Defense

The Mexican government’s unprecedented steps to protect the peso are off to a good start.
The currency posted its biggest rally in five years Wednesday after officials said they will increase the benchmark interest rate, reconfigure an intervention program to contain volatility and reduce government spending. It advanced another 0.5 percent on Thursday. The new measures came after the peso plunged 8.9 percent to start the year, the worst performance among major currencies, and was down 31 percent over the past 18 months as investors sold off emerging-market assets.