There Is No Such Thing As A Theory of The Invisible Hand

Myth making at its finest. From a book review of “How Markets Fail” by John Cassidy:

Debunking theories

ALAN Greenspan has a dangerous weakness for Adam Smith – he believes firmly that untrammelled capitalism provides a uniquely productive method of organising markets.

Paying homage to Smith’s Theory of Invisible Hand, Greenspan wrote, shortly before the explosion of subprime crisis, “People must be free to act in their self-interest, unencumbered by external shocks or economic policy ... Yet, even in crises, economies seem inevitably to right themselves.”

Curbing Household Debt

BNM will apparently be making an announcement next week on limits to housing loans:

Bank Negara likely to announce property curbs next week

KUALA LUMPUR: Bank Negara is expected to announce next week measures to curb property speculation and a programme to create financial awareness for the youth, said sources.

The introduction of a loan to value requirement for people buying their third house or more has been talked about, but central bank governor Tan Sri Dr Zeti Akhtar Aziz said any new rules regarding property loans would not be a blanket clamp. ..

The Efficiency of Taxation: Save The Environment, Tax Petrol

Part of the new budget proposals was a tax break for “hybrid” cars, which use both petrol and electrical-driven engines to achieve heretofore unheard of fuel economy. But is this a good idea? Not so much in terms of encouraging the adoption of “green” vehicles, but rather in terms of whether this is actually the best deployment of the government’s financial resources.

In any case, others are talking about further measures along the same vein:

Rich Dad, Poor Dad: Or How To Get Rich Without Really Trying

And the answer is: Write a book on how to get rich.

It’s a bit off-topic I know, but I consider this a public service. If you’ve read the book, or any other that Robert Kiyosaki has written, do yourself a favour and read this.

What’s The Impact Of The 2011 Mega Projects?

There’s a raging controversy in the aftermath of the budget regarding the spate of big mega-projects that were announced – the yet-to-be awarded Mass Rapid Transport system for Greater KL, the Dubai-based Mubadala Group and 1MDB hook-up for the development of a KL Financial District (I still have no idea where this will be located), and of course PNB’s 100-story Warisan Merdeka project. The last has especially attracted an uncommon amount of vitriol from Malaysians. The least troublesome of these projects would be EPF’s Sg Buloh development project, as there won’t be any “special” needs involved.

I’m going to forbear commenting on the feasibility of the projects as I’m not really qualified to comment on them. What I will do is speak to the possible macroeconomic effects of these projects, insofar as that’s possible with virtually no information beyond their projected development value.

ETP Roadmap: PM’s Speech

In case you missed it, the videos are on Youtube. Sorry, they’re in Bahasa Malaysia only:

Zeti Says: No Sudden Moves

On Bloomberg today:

Malaysia’s Zeti Doesn’t Want ‘Sudden’ Currency Moves

Oct. 27 (Bloomberg) -- Malaysian central bank Governor Zeti Akhtar Aziz said she doesn’t want to see sudden currency moves and expressed concern that global policy makers may rely too much on exchange-rate changes to deliver sustainable growth…

…Bank Negara Malaysia should watch the ringgit’s “underlying trend” and wants gradual moves, Zeti said. Malaysia’s currency reached a 13-year high this month.

Tun Dr Mahathir Points Out The Elephant In The Room

So much for staying away from blogging.

It was a little over a year ago that I wrote a post on what the Malaysian economy would look like in the run up to becoming a high income economy.

Now our ex-PM points out the same problem that I worried about:

Book Plug: Fixing Global Finance

I’ve an awful lot of research papers that I want to highlight, in addition to going through the ETP proposals in detail. As such there won’t be any posts for the next couple of days, so in the interim, I’d just like to showcase a book and a working paper that supports it.

Back in July, I highlighted an article on VoxEU regarding the imposition of capital controls in East Asia. The author got in touch with me, and has now published a book on the subject:

Fixing Global Finance
A Developing Country Perspective on Global Financial Reforms
Kavaljit Singh

The financial crisis which erupted in mid-2007 has been widely viewed as the most serious financial crisis since the Great Depression of the 1930s. The crisis which originated in developed countries quickly spread to developing countries and the rest of the world. The turbulence in financial systems was followed by a significant reduction in real economic activity throughout the world. The crisis has highlighted that financial markets are inherently unstable and market failures have huge economic and social costs. The crisis has renewed debate on the role of global finance and how it should be regulated.

The aim of this book is to encourage and stimulate a more informed debate on reforming the global finance. It examines recent developments and problems afflicting the global financial system. From a developing country perspective, it enunciates guiding principles and offers concrete policy measures to create a more stable, equitable and sustainable global financial system. Several innovative measures have been proposed to reform the global finance and to ensure that it serves the real economy.

ETP Roadmap Download

Hot off the press. If you still want a hard copy, MPH will be carrying it nationwide from tomorrow.

ETP Roadmap Launch: We Are Live At PWTC (Updated)

Well so much for well-laid plans. After enduring an hour long jam just to get in the place, and going round in circles trying to find parking, I find that the auditorium is full. There’s still at least a few hundred people milling around outside as well, Right now, I’m sitting in a hall on the 2nd floor which has a live feed.

The World Has Turned On Its Axis: Didn’t Notice, Did You?

From this weekend’s G20 meeting comes the news of a realignment in the IMF’s governance structure:

G-20 Ministers Agree ‘Historic’ Reforms in IMF Governance

Ministers of the Group of Twenty (G-20) industrialized and emerging market economies agreed on a proposed raft of reforms of the IMF that will shift country representation at the IMF toward large, dynamic emerging market and developing countries.

Currency Wars Part VI

From the Forex Blog:

Currency War Devalues all Currencies…Except for Gold

Then there are those that believe all currencies will suffer, and that even the currencies that are still rising are actually depreciating in real terms (due to inflation). Those who harbor such beliefs will often try to short the entire currency market, usually by betting on commodities or heavy metals, of which Gold is probably the most prominent.

The price of Gold has risen more than 20% this year (in USD terms). Its backers claim that it is the ultimate store of value (where this derives from is unclear), and defend its lack of utility and inability to accrue interest by arguing that its appreciation is more than enough of a reason to own it. When you look at the performance of gold over the last five years, you begin to wonder if maybe they have a point.

I’m kinda busy this morning so I’ll forbear commenting on this issue…again. But I will add that the best academic guess for when the gold market will reverse is when interest rates start rising again in the developed world. Since the Fed is committed to keeping rates low “…for an extended period”, that might be 2-3 years down the road.

In the meantime, gold is likely to continue to increase in USD terms - $2000? $3000? Your guess is as good as mine. There’s certainly no other fundamental reason for buying gold.

LiveBlogging The ETP Roadmap Launch

I’ve got an invite to the ETP Roadmap launch this afternoon, which is due to start around 3.00pm. So I’m going to try an experiment – if my modem line holds up, I’m going to try live-blogging the event. Pics will be uploaded later tonight, if I can manage it.

Stay tuned.

September 2010 CPI: Eat And Be Merry

Yesterday’s Consumer Price Index report from DOS was interesting, in a nice kind of way. I would have expected that over the Ramadhan-Syawal period, we’d see some increases in food prices at least – apparently not (log annual and monthly changes; 2000=100; click on pic for larger version):

Currency Wars Part V

Seems I spoke too soon, though whether this is a blip or something more permanent remains to be seen. BNM’s latest biweekly statement of international reserves shows an RM12 billion increase up to October 15, which puts total intervention to weaken the Ringgit over the past 2 ½ months at a revaluation adjusted RM22.5 billion.

The Ringgit touched a little above 3.08 to the USD on Oct 14 and 15 then bounced back up to 3.12 on Wednesday (Oct 20), which suggests to me anyway, that BNM isn’t that keen for the Ringgit to breach below the RM3.00 level – at least not yet. My sense is that BNM is looking at limiting the Ringgit’s movement against the USD to about 1%-2% a month at most, though the pattern of intervention over the past couple of years suggests that they’re agnostic to the level.

Currency Wars Part IV

Tun Dr Mahathir fires a shot, with his usual candour:

THE CURRENCY WAR

1. Malaysians, including Malaysian monetary authorities seem quite happy over the appreciation of the Ringgit against the US Dollar. We think that when our currency strengthens it must be because our economy is strong. Therefore we are doing well.

2. But are we doing well? Is it the Ringgit which is appreciating or is it the US Dollar which is devaluing?

3. Actually it is the US Dollar which is devaluing. It is devaluing against most other currencies, especially against China's currency.

August 2010 Employment Report

The August 2010 report on labour force statistics shows unemployment falling to the lowest level so far in this series:

But I’d take this with a grain of salt, as I’m expecting the jump in employment due to the Census to fall back in September. There are already some signs of that occurring, with August showing a loss of 113k jobs:

Currency Wars Part III: How Much Is BNM Intervening In The Ringgit?

It finally occurred to me that there absolutely has to be some forex intervention going on in Malaysia, if only because the level of reserves is not dropping as fast as the Ringgit is rising. But the degree to which BNM is intervening is so small, that I’m not sure whether its worth talking about.

To understand the relationship between Malaysia’s international reserves and the Ringgit, you have to understand the mechanics of intervention, as well as BNM’s policy on revaluation of reserves. The level of international reserves can only change from one or the other, or both. If there is no intervention – and this is important to understand – there will be no change in the level of reserves except on revaluation (added 22/10/2010 for clarity).

August 2010 Economic Indicators

The latest Economic Indicators report from the Department of Statistics brings some short relief to the economic outlook – but we’re still not out of the woods yet:

Financial Crises: Who’s Next?

I’m leaving Malaysia for a short sojourn offshore – figuratively speaking.

East Asia and others gained a salutary lesson 10 years ago during the 1997-98 financial crisis about the dangers of short-term capital flows. We’ve generally applied that lesson today, in the aftermath of the recession and the subsequent flood of liquidity aimed at emerging markets.

Some countries have responded with controls on short term capital flows, of which Thailand’s 15% withholding tax on government bond purchases last week was just the latest. Others, like Malaysia and Singapore, have generally refrained from administrative measures, instead allowing a sharper appreciation of their currencies to limit incentives for portfolio capital inflows and keep a lid on inflation.

Yet others don’t appear to have gained anything from East Asia’s experience:

When China Moves, Countries Tremble

The Peoples Bank Of China has finally given up on reserve ratios as their preferred monetary tool, and have raised interest rates by 25bp:

Asian Stocks Fall to Two-Week Low After China’s Rate Increase

Oct. 20 (Bloomberg) -- Asian stocks dropped, dragging the MSCI Asia Pacific Index to a two-week low, after China unexpectedly raised lending and deposit rates to curb inflation in the world’s fastest-growing major economy...

..."The perceived problem with China raising rates is it limits economic growth from one of the higher growth economies," said Tim Schroeders, who helps manage about $1 billion at Pengana Capital Ltd. in Melbourne. "Markets in Asia have adopted a very cautious approach to today’s trading in light of this news."

It’s The Little Things That Matter

One of the funny things about the debate over Malaysian educational reform is that it’s distinctly lopsided (at least, from my perspective). A lot of the focus is on the structural graduate unemployment that Malaysia faces, which naturally leads to the feeling that it’s the universities that are in dire need of change. (There’s also the issue of vernacular schools, but there’s better commentary on that in the blogosphere than I could ever give).

But the empirical evidence suggests that life outcomes are highly correlated with the quantity and quality of primary education, and somewhat less so with secondary education. Tertiary education doesn’t even get a look in, though on an individual level it helps to be at a good college. The implication is that early education is far more important than many people realise, and the earlier the better.

MIER Forecasts 50bp Rise In The OPR For 2011

The Malaysian Institute of Economic Research (MIER) is one of the oldest independent think tanks in Malaysia, and publishes a quarterly economic outlook as well as Business Conditions and Consumer Sentiment Surveys. Their latest economic outlook forecasts one or more interest rate hikes next year (summary):

MEO 3Q 2010 Executive Summary

...MIER maintains 2010 and 2011 economic growth of 6.5% and 5.2%, respectively. Importantly, these forecasts are also supported by recent in-house surveys. The Business Conditions Index (BCI) fell sharply to 104.9 pts in 3Q10, which more than offsets the surge in the Consumer Sentiment Index (CSI) to 115.8 pts. Other indices also painted a similar gloomy environment ahead.

In terms of interest rates, MIER anticipates the OPR to be kept at 2.75% until end-2010. This is useful in order to assess the effects of previous rate hikes and the possible impact from economic fallout in the Eurozone. The OPR will trend higher to 3.25% in 2011, in tandem with a higher overall CPI forecast of 2.5% yoy (2.2% in 2010).

I’m not sure I’d be brave enough to stick my neck out for this one, as BNM is notoriously unmoved by supply-side driven inflation. The last time BNM hiked rates, in 2005-2006, it was in response to capital inflows arising from the abolishment of the USD peg. With growth expected to slow, we’re obviously not talking about a demand-side driven increase in the price level, nor is the economy yet showing any signs of fully closing the output gap.

The only real argument for further monetary tightening would be due to the continuing influx of foreign portfolio capital, but that I think is more likely to attract administrative measures (aka capital controls) rather than a broad-based increase in the price of borrowing.

Currency Wars Part II

William Pesek of Bloomberg weighs in (emphasis added):

Currency War Is Solved With One Trip to Bangkok

Oct. 15 (Bloomberg) -- Those finance bigwigs blabbing away in Washington last weekend should visit Bangkok instead.

That’s where the “currency war,” which they naively believe they can avoid with their handiwork, is on display. Just as Thailand was on the front lines of Asia’s 1997 crisis, it’s being flooded by liquidity from Washington, Tokyo and Frankfurt.

On Oct. 12, Thailand removed a 15 percent tax exemption for foreigners on income from domestic bonds, joining South Korea and Brazil in curbing hot-money flows and currency gains. The former risks overheating, the latter threatens exports…

…Think of markets as a giant game of Whac-A-Mole. Officials from Beijing to Brasilia stand at the ready, hammers in hand, to whack down any spike in exchange rates. The trouble is, everyone is whacking at once. When everyone tries to tame currencies simultaneously, there will be few, if any, winners.

Budget 2011: By The Numbers (Updated)

I’m not going to regurgitate the analysis and feedback available through the papers since, well, it’s available through the papers (here’s the Star’s reporting).

But I do want to give some perspective to the government’s spending plans and forecasts for this year and next, which are of greater interest. Quite frankly, apart from the front-loaded news on the infrastructure projects, this year’s budget presentation is about as anticlimactic as they come.

But let’s see the government’s spending plans and revenue projections in historical perspective (RM millions; sample: 1976-2011f; includes development spending):

Federal Government Budget 2011: First Impressions

At first reading (and hearing), this budget seems determinedly populist, especially if you heard the last ten minutes live:

1. Big infrastructure projects, like the Warisan Merdeka development and EPF’s Sungai Buloh development;
2. The establishment of the National Wage Consultation Council (which will set the minimum wage);
3. The increase in civil service maternity leave;
4. The continuance of the electricity bill rebate;
5. Subsidised low cost Housing  loans for estate workers;
6. Government guarantees for the 10% deposit for first time homebuyers, for those earning less than RM3000;
7. Increase in monthly allowances for community leaders including Imams (almost double the previous level); and
8. No toll rate increase for highways under PLUS for the next five years.

Waiting For The Budget: GNI Per Capita

While I’m hanging around waiting for the budget broadcast to begin, here’s a quick note on the New Economic Model target.

You may recall that the NEM target is a minimum of USD15,000 per capita GNI by 2020. I’ve gone on the record to say that I think we’ll reach that target pretty easily, because of:

1. The Ringgit’s appreciation, which is a by-product of going up the development scale; as well as
2. Through the demographic transition that Malaysia is going through.

That doesn’t detract from the necessity of some of the NEM/ETP objectives however – I still believe that a restructuring of the economy is necessary to spread the wealth around, as well as to put the economy in a less vulnerable position relative to external demand.

GST Postponed

Of all the news that’s come out over the last couple of days, the news over the postponement of GST (Goods and Services Tax) implementation has got to be the most disappointing (read the original press release here, reasonable English translation via The Star).

The reaction (and underlying explanations) to the postponement are more disappointing still (emphasis added):

GST acceptance easier if reductions known upfront

PETALING JAYA: The goods and services tax (GST) may have found easier acceptance if the Government had made known a reduction in corporate and personal tax rates upfront.

Observers said due to the politically sensitive nature of imposing new taxes, even indirect ones, the move to implement the GST necessitated a more transparent communication over how and when personal and corporate taxes would be restructured...

Budget 2011 Thoughts

I’ll be teaching a bunch of unemployed graduates over the next two days, so don’t expect much in the way of posts until after then. Having said that it’s budget time again, with next year’s fiscal plans due to be tabled in Parliament on Friday.

I really don’t have much to add to the speculation over what particular measures will be included – there’s a consensus that preliminary funding for the MRT system for KL will at least be included, but apart from that everybody’s really guessing on which of the ETP projects will come up front and centre.

In any case as a macro guy, I’ve always been more interested in the aggregate effect of fiscal policy rather than the particulars, where the impact is often hard to discern – I think governments too often get the credit when the going is good, and too much of the criticism when the going is bad.

But one thing I’m fairly certain of is that the fiscal deficit for this year will be less than expected, assuming the government maintains fiscal discipline – I expect revenue to be at least 10% higher than the government’s forecast, and GDP will also come in higher. That of course leaves expenditure, which is discretionary. They’ve already increased spending plans by RM10 billion RM12 billion over and above the original allocation, which will cut into the revenue increase, but I don’t expect it to be so much as to fully lose the gains from higher revenue.

The 2010 Riksbank Prize in Economics Sciences Goes To…

Peter A. Diamond of MIT, Dale T. Mortensen of NWU, and Christopher A. Pissarides of LSE “for their analysis of markets with search frictions."

From the press release:

Why are so many people unemployed at the same time that there are a large number of job openings? How can economic policy affect unemployment? This year's Laureates have developed a theory which can be used to answer these questions. This theory is also applicable to markets other than the labor market.

On many markets, buyers and sellers do not always make contact with one another immediately. This concerns, for example, employers who are looking for employees and workers who are trying to find jobs. Since the search process requires time and resources, it creates frictions in the market. On such search markets, the demands of some buyers will not be met, while some sellers cannot sell as much as they would wish. Simultaneously, there are both job vacancies and unemployment on the labor market.

Say What? Redux

One of my aims with this blog is to approach the question of economic policy from the “wrong” side of the bed – in a manner of speaking. Instead of using the more usual way of applying theory to try to explain what’s happening in Malaysia and the world, I prefer to follow the opposite route which is to look at the stats and then see which theory really fits the numbers.

To be honest, you really need to use both approaches to arrive at appropriate policy decisions, but I think you make less egregious mistakes by looking at reality first.

Case in point: in an article today at the Malaysian Insider, Datuk Jema Khan is calling for a repeg of the Ringgit to preserve “economic competitiveness” (emphasis added):

Beware the ringgit

…Our ringgit is the best performing currency in Asia for 2010, having risen by more than nine per cent whereas China’s yuan has only appreciated by two per cent as a result of its central bank’s intervention.…

…The major economies of the US, Japan and the UK are flooding the world with liquidity and that liquidity is coming to Asia. For Asia, that is not necessarily a bad thing as it means more inward FDI inflows, but unfortunately it appears that Malaysia is not benefitting from it.

August 2010 Industrial Production

The August IPI report was released today, and like last week’s trade numbers, have been infected by the “holiday” spirit. Annual and monthly growth ticked up ever so slightly, driven mainly by higher electricity output (log annual and monthly changes; seasonally adjusted):

Say What?

There was this article over the weekend on the Ringgit, for which I have very little comment, except for one stupefying line and one irrelevant one (emphasis added):

A stronger ringgit review

OVER the past few months, one topic has been in the limelight and it shows no sign of tapering off. Over the week, the ringgit hovers at 3.05-3.08 against the greenback or US dollar, and about 4.80 against the British pound...

...So why has the ringgit been appreciating? There are many arguments brought about from different schools of thoughts, but few are worth mentioning here. First, is the fact that the United States has recently undergone a recession (or still is?) and therefore, in order for it to recover, the greenback is taking a “back-seat”.

Another explanation will be the balance of payments methodology, whereby foreign exchange rate must be at its equilibrium level, which is the rate that produces a stable current account balance.

Malaysia, having a trade surplus, will experience an increase in its foreign exchange reserves, which ultimately appreciate the value of the ringgit.

August 2010 External Trade:

Friday’s release of August trade data showed, quite frankly, some pretty awful numbers. But as I talked about last month the Ramadhan effect was likely to take a toll on the numbers anyway, so it’s not panic stations just yet, especially since there’s no breakout from last month’s forecast range (log annual and monthly changes; seasonally adjusted):

Taking away a slight uptick in June, we’re now in the fifth month of consecutive declines in exports (seasonally adjusted), and the third in imports. Given the structure of Malaysia’s trade, where much of imports are used as inputs into exports, there’s more than enough evidence here of falling external demand – it’s certainly not coming from lower commodity prices:

The US Dollar And The US Trade Deficit

Marty Feldstein thinks the US Dollar will weaken…and that’s a good thing:

Feldstein Says Dollar to Weaken, Boosting Exports

Oct. 7 (Bloomberg) -- Martin Feldstein, a Harvard University professor who was chief economic adviser to President Ronald Reagan, predicted the dollar will weaken, boosting exports and strengthening the U.S. economy.

“Dollar weakness will be one of the few things that will improve our trade balance, and that will strengthen our exports,” Feldstein said in a Bloomberg Television interview today on “Surveillance Midday” with Tom Keene. “It will cause Americans to shift from imported goods into domestic services. All of that will strengthen the economy.”

Fund managers with large pools of dollars were converting the currency into euros before “all hell broke loose” during the European debt crisis, Feldstein said. As they resume trading dollars for euros, and the U.S. trade deficit remains high, the dollar will depreciate, he said…

Kenneth Rogoff On Gold

Via Greg Mankiw’s blog (excerpts):

$10,000 Gold?
Kenneth Rogoff

SAN FRANCISCO – It has never been easy to have a rational conversation about the value of gold. Lately, with gold prices up more than 300% over the last decade, it is harder than ever. Just last December, fellow economists Martin Feldstein and Nouriel Roubini each penned op-eds bravely questioning bullish market sentiment, sensibly pointing out gold’s risks...

...Admittedly, getting to a much higher price for gold is not quite the leap of imagination that it seems. After adjusting for inflation, today’s price is nowhere near the all-time high of January 1980…At $1,300, today’s price is probably more than double very long-term, inflation-adjusted, average gold prices. So what could justify another huge increase in gold prices from here?

“Soaring” International Reserves

One of the reasons I’ve always had my charts showing several years worth of data is that I’ve always thought a historical perspective was useful, and in fact necessary, when looking at economic data.

A picture can mislead, but it won’t lie outright.

Case in point is The Star’s otherwise unremarkable article on BNM’s September international reserves position:

Malaysia's foreign reserves soars to RM310.8b

Rreserves [sic] position is sufficient to finance 8.5 months of retained imports and is 4.3 times the short-term external debt

KUALA LUMPUR: Bank Negara’s international reserves amounted to RM310.8bil as at Sept 30.

Currency Wars

Over the last two weeks, rhetoric has been building up over currency “manipulation” among major trading nations. The biggest target is of course China, with the turtle-slow adjustment of the CNY-USD exchange rate, but their far from the only ones. The Bank of Japan intervened in the Yen market in a big way last month, and Brazil, South Korea and Indonesia have instituted capital controls to a greater or lesser degree. Nor is currency intervention limited to emerging or Asian markets, as Adam Kritzer talks about in this blog post:

Currency War: Who are the Winners and Losers?

It’s still too early too early to say how far the currency war will go. The G7/G20 has announced that it will address the issue at its next summit, though it probably won’t lead to much in the way of action. Ultimately, politicians can’t do much more than shake their fingers at countries that try to hold down their currencies....

…That brings me to my final point, which is that all currency intervention is futile in the long term, because most Central Banks have limited capacity to intervene. If they print too much money to hold down their currencies, they risk stoking inflation…For Central Banks to successfully manipulate their currencies on the spot market, they must fight against the Trillions of Dollars in daily forex turnover. Eventually, every Central Bank must reckon with this truism.

PEMANDU Acting Fast And Loose With The Numbers…Again

Once is an accident, two a coincidence, three times…well.

I first remember seeing this particular stat at the ETP Open Day, but didn’t think much of it at the time…maybe I should have looked closer. But this article shows that others are picking up on the “fact” that loan growth has moderated in the last five years compared to the early part of the decade (excerpts; emphasis added):

ETP to help revitalise financing sector

High loans growth seen in construction, real estate and transport sectors

PETALING JAYA: Loans growth from banks’ domestic operations which had shown signs of moderation over the past five years is expected to be boosted by increased activities under the Economic Transformation Programme (ETP).

Based on statistics released under the ETP, loans growth from banks’ domestic operations had moderated to a compounded annual growth rate of 10% in the five-year period of 2005 to 2009 versus 13% between 2001 and 2005…

ETF’s, Index Tracking Investment, And Irrational Markets

One of the seminal contributions to the macroeconomic literature of the last fifty years was the Lucas Critique, which in short states that changes in policy affects individual behaviour, which in turn means that you can’t reasonably expect that policies implemented would have the intended effects based on historical macro relationships. More generally, everything affects everything else, and you can’t take things in isolation.

While this is part and parcel of the now controversial doctrine of rational expectations (for which Robert Lucas won the Nobel Prize in 1995), the fundamental point that Lucas was driving at is still valid – you can’t assume that interrelationships will always stay the same, if you change something within a system. The mania over structured finance products that helped drive this past global financial crisis is a case in point, but it applies to virtually any financial product or government policy.

Which brings me to this article in The Star today:

What are ETFs and why is it beneficial to buy them?
Personal Investing - By Ooi Kok Hwa

LATELY, the number of ETFs that get listed on Bursa Malaysia has been increasing.

At present, we have a total of five ETFs listed in Malaysia. Unfortunately, we have noticed that not many investors are aware of these instruments and there is also a lack of understanding on the true value of these ETFs.

The Purchasing Power Of Gold Part II

A couple of months back, when the contretemps over the Kelantan Gold Dinar was at its height, I did a post on testing the stability of gold’s purchasing power. But in the last couple of weeks, gold on the international markets has been breaching new highs, virtually on a daily basis:

Gold price rises to yet another high, other commodities too rise

PETALING JAYA: Gold rose to a new all-time high yesterday, while other major raw materials – from copper to cotton – continued to head north as some investors see commodities as safer bets against inflation.

Spot gold price hit US$1,328 an ounce following a surprise pledge by the Bank of Japan yesterday to keep interest rate at virtually zero and to step up purchases of assets.

This had sparked fresh worries that central banks in developed countries may have to further their so-called quantitative easing policy to bolster their ailing economies...

If You’re Taking Academic Research Too Seriously…

…you have to read this. My favourite:

ENGINEERING PRIZE: Karina Acevedo-Whitehouse and Agnes Rocha-Gosselin of the Zoological Society of London, UK, and Diane Gendron of Instituto Politecnico Nacional, Baja California Sur, Mexico, for perfecting a method to collect whale snot, using a remote-control helicopter.

REFERENCE: "A Novel Non-Invasive Tool for Disease Surveillance of Free-Ranging Whales and Its Relevance to Conservation Programs," Karina Acevedo-Whitehouse, Agnes Rocha-Gosselin and Diane Gendron, Animal Conservation, vol. 13, no. 2, April 2010, pp. 217-25.

(H/T Dan Hirschman)

iPhone 4 Winners and Losers

This article had me grinning – the last line is sooo full of irony:

iPhone 4 launched by Maxis, DiGi; but which has better plans for subscribers?

PETALING JAYA: Hundreds of buyers queued for hours to get their hands on the newly launched iPhone 4 when it was up for grabs last week. Both Maxis Bhd and DiGi.Com Bhd launched Apple’s latest iPhone 4 last week…

…Teo, a first-time iPhone user, said she had been waiting for the phone ever since it was launched in the United States in the middle of the year.

Teo said she was attracted more by the “cool” aura that iPhones conveyed than the technology itself.

Economics As A Religion

Andrew Sheng turns into a satirist:

Economics is a religion, not a science

…But let us come back to the big debate: Should governments cut deficits or increase them to get jobs going?

My personal view is that if the United States suffers from fundamentally excessive consumption financed by excessive leverage, then simply increasing public debt to substitute for Wall Street losses does not make sense.

De-leveraging has to happen some time, either in the private or public sector and de-leveraging means cutback in consumption…

…The Keynesian argument that if the private sector lacks confidence to spend, the government should spend is not wrong. But Keynes did not spell out where the government should spend. Nor did he envisage that lobbyists can influence government spending to be wasteful. Hence, every prophet can be used by his or her successors to prove their own points of view. This is religion, not science.

August 2010 Monetary Conditions Update

With most of August falling within the month of Ramadhan, an uptick in the money supply is to be expected – much like for Chinese New Year, BNM makes available newly printed money (the physical kind) for “duit raya” and “ang pow”.

On that basis, an acceleration in M1 growth is normal (log annual and monthly changes; seasonally adjusted):

Sometimes Government Policy Does Work Part II: Not All Bailouts Are Equal

During the depths of the global financial crisis, there was a lot of anxiety over the “bailout” of the US banking system (later extended to other corporates such as GM) via the Troubled Asset Relief Program (TARP), which on its own amounted to nearly USD700 billion (about half of which was expected to be lost). Consisting of injections of capital and purchases of illiquid, risky assets, TARP provided a backstop to the banking system’s liquidity risks when the interbank market collapsed in late 2008.

While TARP can be criticised for reinforcing moral hazard problems in the banking sector, it looks like the US Treasury might get off with at worse a small loss (excerpt):

TARP Didn't Bust the Bank
The much-maligned bailout program made money on most Wall Street investments and cost less than expected

Bailed-out banks, insurers, and automakers are a sore spot for millions of Americans hit hard by the financial crisis. Candidates running in November, especially those waving the Tea Party banner, are using "no more bailouts" as their mantra to attract voters. Yet there's a disconnect between the political rhetoric and the facts on the ground.