Anatomy Of A Recession

What causes a recession? Sometimes it’s overinvestment, other times its debt burdened households.

And sometimes, it’s just simple uncertainty (excerpt; emphasis added):

Insight: In euro zone crisis, companies plan for the unthinkable

(Reuters) - When Novo Nordisk's chief financial officer met marketing colleagues last Friday the conversation moved far beyond the usual discussion of sales and performance. Jesper Brandgaard asked a simple, far-reaching question: how would the firm set prices for two pivotal new insulin products if the euro collapsed?...

BNM and MAS: The Ties That Bind

Bank Negara and the Monetary Authority of Singapore have just signed an agreement:

Memorandum of Understanding between Bank Negara Malaysia and the Monetary Authority of Singapore

The Monetary Authority of Singapore (MAS) and Bank Negara Malaysia (BNM) jointly announced today the signing of a Memorandum of Understanding (MoU) to establish a cross-border collateral arrangement aimed at enhancing liquidity facilities to financial institutions in both countries...

Analysing The ECB: The Costs And Benefits Of Inaction

Watching the slow-motion train wreck that is the Eurozone debt crisis, it’s hard for anybody trained in finance or economics to grasp just why the ECB is refusing to act more decisively.

As the Eurozone’s central bank and the only one with the authority to print Euros, only the ECB has the ability to offer unlimited support for indebted governments. Granted that there is a huge pitfall in engendering future moral hazard, but that’s already being handled on the political front via stronger debt rules. The tail risk of inaction is a collapse of the Euro itself.

But the ECB appears to discount that risk:

ECB stance on bond buys to pay off

TOKYO: The European Central Bank's (ECB) refusal to engage in large-scale purchases of the region's sovereign debt will eventually be rewarded as this will preserve price stability and protect the value of the euro over the long term, governing council member Christian Noyer said yesterday.

The Inflation Fallacy: Nick Rowe Explains What I Couldn’t

I’ve been bothered for years by my inability to understand just why inflation is bad. You’re now going to say, “it’s easy you dunce, inflation reduces your purchasing power!!”

But that’s not quite true – in aggregate, that simply doesn’t happen. In accounting terms, income always equals consumption and savings. There’s an element of wealth and income transfer involved between individual agents certainly, but add it all up and inflation only raises the money value of both sides of that equality.

Economic Analysis That Doesn’t Add Up

I don’t know who Baradan Kuppusamy is and I don’t want to give him any more exposure than necessary, but this article he wrote had me laughing (excerpt):

Economic policies that do not add up
Analysis
By Baradan Kuppusamy

The lack of economic expertise in Pakatan Rakyat underlines the many difficulties the Opposition would encounter if it captures Putrajaya.

WHILE Pakatan Rakyat has been quick to capitalise on Barisan Nasional's political setbacks like the current controversy over the National Feedlot Corporation, it is weak in its economic policy formulation, and one reason is the lack of qualified economists.

This shortcoming would weigh heavily on the coalition if it were ever to capture Putrajaya.

October 2011 CPI: Mixed Bag

Wednesday’s CPI report shows core inflation finally – finally! – pulling back (log annual and monthly changes; 2000=100):

It’s still at a dangerously high rate of increase though at 2.4% in log annual terms, but month on month, prices dropped slightly.

September 2011 Employment: Unemployment Ticking Up

After the employment losses of August, the labour market rebounded slightly in September, adding a marginal 7k jobs (‘000):

Crime, Income Inequality, And The Economy: It’s All Related

In the mailbox today (abstract):

Skill-biased Technological Change, Earnings of Unskilled Workers, and Crime
Naci H. Mocan, Bulent Unel

This paper investigates the impact of unskilled workers' earnings on crime. Following the literature on wage inequality and skill-biased technological change, we employ CPS data to create state-year as well as state-year-and (broad) industry specific measures of skill-biased technological change, which are then used as instruments for unskilled workers' earnings in crime regressions. Regressions that employ state panels reveal that technology-induced variations in unskilled workers' earnings impact property crime with an elasticity of -1, but that wages have no impact on violent crime. The paper also estimates, for the first time in this literature, structural crime equations using micro panel data from NLSY97 and instrumenting real wages of young workers. Using state-year-industry specific technology shocks as instruments yields elasticities that are in the neighborhood of -2 for most types of crime, which is markedly larger than previous estimates. In both data sets there is evidence for asymmetric impact of unskilled workers' earnings on crime. A decline in earnings has a larger effect on crime in comparison to an increase in earnings by the same absolute value.

It’s A Woman’s World

From this weekend’s news (excerpt):

Why it pays to invest like a woman

DID you ever think testosterone could be a setback in successful investing, risk taking and trading among other aspects? According to a recent research, apparently too much of it is detrimental.

A man with an inlfated [sic] ego who asserts his alpha male dominance isn't a fantastic trader or investor.

The Motley Fool's Louann Lofton who authored the book: Warren Buffett Invests Like A Girl And Why You Should, Too, pointed out that psychologists and scientists concurred that women have the right temperament to help them achieve long-term success in the market.

BNM Clampdown

I've just had an accident with my laptop - involving a full mug of tea - so I might be offline for a while until I can resolve the problem.
In the meantime, along with the GDP report last week, BNM made two announcements. The first one deals with regional financial integration (excerpt):

Broadening Regional Financial Collaboration

Bank Negara Malaysia will be expanding the list of eligible collateral following greater regional financial integration. This is aimed at enhancing the liquidity management framework. This is in line with the growing significance of regionally active financial institutions which have intensified the financial inter-linkages between economies, particularly in trade, investment and financial services.

In essence, what it means is that BNM is laying the groundwork for financial settlement of cross-border transactions in anything other than US dollars, to go along with the existing swap line arrangements between the region's central banks. Since this means that intraregional trade need not be denominated in US dollars (which requires US dollar liquidity domestically), it also lessens the necessity for keeping excessive US dollar reserves. Malaysia's direct trade with the US is just 10% of total trade, whereas regional trade ex-Japan is at nearly 60%. Recall that the recession of 2008-2009 in Malaysia wasn't really a factor of a drop in real external demand, but a serious drop in US dollar liquidity from flight to safety and a sharp drop in trust within correspondant banking networks.

3Q 2011 GDP: Beating Estimates

Despite a lot of evidence, seems nobody could quite believe that Malaysia’s economy could keep growing – the consensus growth forecast for 3Q2011 was just 4.8%. Consider this some proof that there’s some fire with that smoke (log annual changes; log quarterly changes, seasonally adjusted and annualised):

The Law Of Unintended Consequences

Stephen Gordon talks about fighting inequality in Canada (excerpt):

No, we really don't want to reduce inequality

A few weeks ago, Mike Moffatt wrote an op-ed that ran in the Ottawa Citizen and several other PostMedia papers to the effect that there simply isn't the will on the part of 99% of the population to do much about inequality: if there were, there'd be more popular support for the sort of tax-and-redistribution measures that would actually be effective in reducing inequality. Instead, we get stuff like this:

Ontario’s two opposition parties appear ready to unite to hand the McGuinty Liberals an embarrassing blow just days into a new session.

Progressive Conservative leader Tim Hudak said his party will support an NDP proposal to take 8% off the harmonized sales tax (HST) on home heating bills.

A FAQ On Malaysian Government Debt: Part III

[Since there’s a request for a simpler, more understandable version of the last two posts, this is the condensed version, with answers in two paragraphs or less. The full FAQ can be accessed here]

A FAQ On Malaysian Government Debt: Part II

[Click here for Part I, here for the full FAQ, and here for the condensed version]

Q4. All this increase in debt will be a burden on our children and our children’s children

A. This is based on the idea that debt has to be repaid eventually, and the main source of government income is taxation – basically a corollary of the idea that a government is similar to a household. Hence, in this view, the greater the debt build-up the greater the expected future level of taxation. The popular notion is thus that of the current generation borrowing from future generations.

There’s a problem with this conception. First, since governments are collective enterprises on behalf of the governed, there’s no natural lifespan involved. There’s no necessity for debt to be fully paid off and it can be effectively carried in perpetuity. Some governments have actually taken advantage of this fact to issue perpetual bonds that never mature, and at least one major government has issued a 999 year bond.

A FAQ On Malaysian Government Debt: Part I

[Click here for Part II, here for the full FAQ, and here for the condensed version]

There’s a lot of misconceptions and misunderstandings regarding the level and sustainability of government debt, which has been seriously skewing the public discourse not just about Europe and the US but here as well. [For examples, here, here, here, here and here].

Rather than arguing the points one by one, I’m putting up this FAQ as a central reference point, with some faint hopes that we might move on to a better informed debate about the issue. It’ll be available as a permanent page (see the menu on the top right of every page on this blog), and I’ll update it from time to time. The focus will be on the Malaysian situation, but some of the general principles are applicable elsewhere as well.

Mundell-Fleming In Action: The Trilemma Facing China And India

In two seminal papers, Nobel Laureate Robert Mundell and Marcus Fleming extended the basic Hicks IS-LM model to incorporate an external sector. The most interesting finding is what’s called the Trilemma – a country cannot simultaneously have exchange rate stability, free capital mobility and an independent monetary policy. You can at best target two of these variables, with the third left to market forces. Trying to achieve all three is effectively impossible, as it sets up inconsistencies in the economy that can and will be exploited by economic agents (read: financial markets).

That’s the real basis for the 1997-98 Asian Financial Crisis a decade ago – you can’t have your cake and eat it too. Most of the crisis victims opted for dropping exchange rate stability; Malaysia famously choose to drop capital mobility, then in 2005 followed the others towards exchange rate flexibility as well.

However, there’s nuances to the stark choices implied by Mundell-Fleming. In this new paper highlighted at VoxEU, the Trilemma choices are evaluated for China and India (excerpt; emphasis added):

The financial trilemma in China and a comparative analysis with India
Joshua Aizenman Rajeswari Sengupta

Emerging markets face what some economists are calling a trilemma. They cannot simultaneously target exchange-rate stability, conduct an independent monetary policy, and have full financial integration. So what to do? This column looks at how Asia’s giants are responding – and in different ways...

Credit Card Woes?

Beginning next year, those earning less than RM3000 a month will have their access to easy credit card debt cut (excerpt):

Bank Negara to enforce limit on credit cards starting Jan 1

KUALA LUMPUR: Bank Negara has issued a new ruling to control and manage the debt of credit cardholders earning RM36,000 and below per annum.

The maximum credit limit extended to a principal cardholder in that category cannot exceed twice the holder's monthly income (RM3,000 x 2) per credit card issuer.

To further restrict their spending, they will only be allowed to be a principal cardholder from a maximum of two credit card issuers.

Mark Thoma On Economists and The Future Of Economic Models

He’s responding to a Roger Martin essay (which you can read here) (excerpt):

Should economists be “imagineers” of our future?
By Mark Thoma

...I agree that macroeconomists need to fix their models. But I don’t think that predicting the future based upon “a straight-line projection of the past” is the problem...

...This year’s Nobel prize award to Thomas Sargent and the previous award to Robert Lucas were partly in recognition of their development of the tools and techniques that economists need to go beyond simply trying to extrapolate the future from the past, a procedure that can lead forecasters astray…

…people change their behavior in response to changes in the conditions they face. And this is one of the things that separate what researchers in the hard sciences do from the work of economists…

We Are The 1%

Two different perspectives on income inequality – from the other side. First Greg Mankiw:

The Rich Get Poorer
Greg Mankiw

Here is a fact that you might not have heard from the Occupy Wall Street crowd: The incomes at the top of the income distribution have fallen substantially over the past few years.

According to the most recent IRS data, between 2007 and 2009, the 99th percentile income (AGI, not inflation-adjusted) fell from $410,096 to $343,927. The 99.9th percentile income fell from $2,155,365 to $1,432,890. During the same period, median income fell from $32,879 to $32,396.

These recent numbers illustrate the broader phenomenon, discussed in this paper, that high-income households have riskier-than-average incomes.

The Determinants of Saving

In my inbox today, from the NBER (abstract):

The Determinants and Long-term Projections of Saving Rates in Developing Asia
Charles Yuji Horioka, Akiko Terada-Hagiwara

In this paper, we present data on trends over time in domestic saving rates in twelve economies in developing Asia during the 1966-2007 period and analyze the determinants of these trends. We find that domestic saving rates in developing Asia have, in general, been high and rising but that there have been substantial differences from economy to economy and that the main determinants of these trends appear to have been the age structure of the population (especially the aged dependency ratio), income levels, and the level of financial sector development. We then project future trends in domestic saving rates in developing Asia for the 2011-2030 period based on our estimation results and find that the domestic saving rate in developing Asia as a whole will remain roughly constant during the next two decades despite rapid population aging in some economies in developing Asia because population aging will occur much later in other economies and because the negative impact of population aging on the domestic saving rate will be largely offset by the positive impact of higher income levels.

Productivity and Capital Intensity

I’m almost all the way back – I spent very nearly the whole weekend redoing my whole computer setup, and its very nearly done. It’ll still be a while before I’m posting regularly though, and there’s a lot to catch up on.

In the meantime, here’s a graph to chew on – capital intensity in Malaysia (RM millions per worker):

One of the concerns continually raised over the years has been the level of productivity and value added in Malaysian industry. The above graph is derived from the new capital stock estimates released by the Department of Statistics and labour force data.

Monetary Policy On Hold: No Surprise

The Committee’s looking forward, not back (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.00 percent.

Latest indicators suggest that the global growth momentum has moderated in recent months…

…The domestic economy improved in the third quarter, due primarily to stronger domestic demand…Looking ahead, the weaker external environment could, however, impact the overall growth prospects…

BNM Watch: Last MPC Meeting Of The Year

I don’t think anybody’s thinking will have changed with the stronger numbers coming out in the last couple of months. The almost unanimous consensus is that the Monetary Policy Committee will maintain the Official Policy Rate at 3.00% in their meeting today, and I can’t really disagree, even if I think core inflation is too high and credit expansion a little too frothy.

The main consideration will continue to be sustaining economic growth, and the deteriorating outlook for Europe and slowing growth in China and India may weigh down any hawks on the committee. The US and Malaysia’s other trading partners look better, but output expansion in these regions aren’t going to break any records soon.

Nor do I think there will be much chance for a rate cut either, as the outlook isn’t that bad yet and the selldown in the Ringgit over the past three months with little central bank intervention represents a de facto policy easing all on its own, even if BNM sticks to its interest rate target.

So I’m not looking for any surprises today.

September 2011 Industrial Production: Turning Up

Yesterday’s IPI report shows some momentum building in the Malaysian economy as growth carried over from August (log annual and monthly changes; seasonally adjusted; 2000=100):

Europe In Crisis

I'm back from my trip to Singapore, but I'll be mostly offline today as I'm breaking in a new laptop.

In the meantime, just some quick impressions from yesterday: I attended a briefing by Capital Economics, a private economic research house on the topic of the global sovereign debt crisis - very appropriate under the circumstances. No really big surprises in their presentation, though they've been notably more pessimistic than the consensus. They don't believe the Euro will survive in its present form for much longer, and while the US looks better, the long term liabilities from a dysfunctional healthcare system presents a long term threat to fiscal stability. Emerging markets are in a much better position, with any fallout from a disorderly disintegration of the Eurozone falling mainly on Emerging Europe.

Selamat Hari Raya Eid el Adha

For all Muslims and Muslimah, Eid Mubarak. And for everyone else, have a safe holiday.

I’ll be travelling until Wednesday, so there won’t be any posts until after that.

September 2011 External Trade

September is one of those rare months when the numbers hit my forecast almost exactly, so forgive me for crowing a bit (log annual and monthly changes; seasonally adjusted):

Not that its much comfort – export growth was as flat as an iPad2. If there is anything more to be positive about, it’s that E&E exports might be turning the corner (log annual and monthly changes; seasonally adjusted):

Weekend Reading: Dani Rodrik On The Influence Of Milton Friedman

Harvard professor, free market sceptic and mixed economy evangelist Dani Rodrik on Uncle Milt (excerpt):

Milton Friedman’s Magical Thinking
Dani Rodrik

CAMBRIDGE – Next year will mark the 100th anniversary of Milton Friedman’s birth. Friedman was one of the twentieth century’s leading economists, a Nobel Prize winner who made notable contributions to monetary policy and consumption theory. But he will be remembered primarily as the visionary who provided the intellectual firepower for free-market enthusiasts during the second half of the century, and as the éminence grise behind the dramatic shift in the economic policies that took place after 1980...

...But Friedman also produced a less felicitous legacy. In his zeal to promote the power of markets, he drew too sharp a distinction between the market and the state. In effect, he presented government as the enemy of the market. He therefore blinded us to the evident reality that all successful economies are, in fact, mixed. Unfortunately, the world economy is still contending with that blindness in the aftermath of a financial crisis that resulted, in no small part, from letting financial markets run too free.

Morgan Stanley On China and India

This commentary’s unusually long, but if you’re interested in the short to medium term economic prospects for both countries, it’s a must read (excerpt):

Asia Insight: Why China Needs Consumption and India Needs Investment

In the immediate aftermath of the 2008-09 credit crisis, China and India adopted an easy approach of aggressively boosting domestic demand largely via credit and fiscal expansion. China's policy measures were biased towards boosting investment, which lifted investment/GDP from 41.7% of GDP in 2007 to 48.6% in 2010. India's measures were biased towards boosting consumption and did not focus on generating new productive capacity.

The aggressive policy push to domestic demand in the region, particularly in China and India, lacked the productivity dynamic of private sector-led growth, leading to a swift return of the inflation problem and questions over asset quality in the banking system. As we enter another phase of global growth slowdown, we believe the time has come for policy-makers to accelerate policy measures to make the transition towards boosting growth on a sustainable basis…

There's acknowledgement of demographic pressures - something often lacking in other economic commentary - as well as policy challenges in restructuring China's and India's economies. Both are suffering from moderately high inflation, with somewhat higher inflation in India. Both economies also have huge potential, with large populations and economies still transitioning towards full industrialisation. The future of Asia will revolve around developments in these two giants.

One Step Back, One Step Forward

The European Central Bank has institutional schizophrenia (excerpt):

ECB Unexpectedly Cuts Rate as Draghi Rules Out Debt Backstop

Nov. 3 (Bloomberg) -- The European Central Bank unexpectedly cut interest rates at Mario Draghi’s first meeting in charge even as the new president signaled no plans to backstop the region’s most vulnerable nations as the escalating debt crisis threatens to splinter the euro region.

“What makes you think that becoming the lender of last resort for governments is what you need to keep the euro region together?” Draghi asked reporters in Frankfurt today. “That is not really in the remit of the ECB. The remit of the ECB is maintaining price stability in the medium term.”

The Future of Banking

VoxEU has a new compilation of the latest European thinking on  reforming finance. While a lot of it is in EconoEnglish, I think many will find some sympathy with the ideas and issues being addressed. For example, since in a crisis the importance of finance to the economy means that banks will be bailed out or at least debt will be worked out, there is a socialisation of losses but gains will be private in more normal times. In other words, there is a negative externality involved in banking, which is not fully reflected in its pricing, the pursuit of gain or risk taking, or in its distribution of profits.

These and more issues are discussed, so if you’re willing to wade through some of the jargon, the e-book is still a worthwhile read.

Technical Notes:

Beck, Thorsten ed., “The Future of Banking”, Centre for Economic Policy Research, October 2011

National Bankruptcy In The News Again

I’m somewhat bemused by the how this whole thing got brought up again. It started with an innocent question from the floor about last year’s imbroglio over Idris Jala’s prediction that the government would go bankrupt if subsidies were not rolled back. Of course, given the subject matter, it’s no surprise the media went with the story.

Now whole thing has just reared its ugly head again (here’s bro satD’s reaction). Quite frankly it was a dumb idea to sell the public on subsidy rationalisation on the basis of public finances – because all it did was focus the attention on public finances (e.g. this reaction from the FM2), and not on the desirability of reducing subsidies as an argument on its own. Admittedly that’s a tougher sell, but still the correct one.

Honestly, the government’s finances are just fine, thank you. Now can we get back to discussing more important matters, such as what they’re spending the money on?

Economic Transformation Programme: One Year On

So, I was sitting in the audience yesterday, with some mixed feelings. On the one hand I’m troubled by the flaws in the worldview presented as its raison d'etre. And on the other, I’m truly fascinated in this experiment in public policy implementation – perhaps the best example of its kind in the world, or even the only one of its kind. It serves a big purpose in terms of changing the psychology of citizens, businesses and consumers regarding Malaysia’s prospects. All that investment is nice, too, and Idris Jala is as ever an engaging speaker.

September 2011 Monetary Conditions

Malaysian money supply growth accelerated through the quarter ended September, helped by a nice dose of extra fixed deposits and forex deposits (log annual and monthly changes; seasonally adjusted):

DeLong On The ECB

J Bradford DeLong on Project Syndicate (excerpt):

The ECB’s Battle against Central Banking

BERKELEY – When the European Central Bank announced its program of government-bond purchases, it let financial markets know that it thoroughly disliked the idea, was not fully committed to it, and would reverse the policy as soon as it could. Indeed, the ECB proclaimed its belief that the stabilization of government-bond prices brought about by such purchases would be only temporary.

It is difficult to think of a more self-defeating way to implement a bond-purchase program. By making it clear from the outset that it did not trust its own policy, the ECB practically guaranteed its failure. If it so evidently lacked confidence in the very bonds that it was buying, why should investors feel any differently?

ETP Is One Year Old

Pemandu will be commemorating the 1st anniversary of the launching of the Economic Transformation Plan today at the Sime Darby Convention Centre in Bukit Kiara:

There will be a live feed of the proceedings, which can be viewed on the ETP blog from 3.00pm onwards.