Monday, February 28, 2011

Income Inequality, Household Debt and Financial Fragility

I really like this article, not least because it backs some of my instincts regarding some of the underlying issues underlying Malaysia's low-wage problem:

Inequality, leverage and crises
Michael Kumhof & Romain Rancière

Of the many origins of the global crisis, one that has received comparatively little attention is income inequality. This column provides a theoretical framework for understanding the connection between inequality, leverage and financial crises. It shows how rising inequality in a climate of rising consumption can lead poorer households to increase their leverage, thereby making a crisis more likely.

The US has experienced two major economic crises during the last century – 1929 and 2008. There is an ongoing debate as to whether both crises share similar origins and features (Eichengreen and O'Rourke 2010). Reinhart and Rogoff (2009) provide and even broader comparison.

One issue that has not attracted much attention is the impact of inequality on the likelihood of crises. In recent work (Kumhof and Ranciere 2010) we focus on two remarkable similarities between the two pre-crisis eras. Both were characterised by a sharp increase in income inequality, and by a similarly sharp increase in household debt leverage. We also propose a theoretical explanation for the linkage between income inequality, high and growing debt leverage, financial fragility, and ultimately financial crises.

Friday, February 25, 2011

December 2010 Economic Indicators: Bouncing Up

This report actually got issued at the same time as the CPI, but I hadn’t had time to go into it before this.

Essentially it confirms the insight from the 4Q GDP report – things are indeed looking up:


X Marks The Spot: Demographics and the Middle East

I think William Pesek has this pegged just right (excerpt):

Sex Ratio Does Magic in China Amid Egypt Effect: William Pesek

Feb. 24 (Bloomberg) -- The world abhors China’s one-child policy. Officials in Beijing must be quietly toasting its very existence as the Middle East burns.

A common thread linking events in Egypt, Bahrain, Tunisia, Libya and elsewhere is big populations of disaffected youth. They’re angry about greed, corruption, the rich-poor divide and unaccountable leaders. Many Chinese harbor similar gripes, yet demographics works in the Communist Party’s favor.

Had China not instituted population control in 1979, there would be tens of millions more underemployed and aggrieved young men milling about in China’s cities. Just the type to foment revolution -- a Tiananmen Square 2.0. Only, they were never born. Turns out, the policy is a boon for Chinese regime control.

The longer-term implications are far less advantageous. China’s working-age population will start shrinking in 2020, denting growth. For now, though, demographics is a key reason China isn’t Egypt. It also could mean slower yuan gains amid fear that less growth will fan unrest…

Thursday, February 24, 2011

January 2011 CPI Inflation: No Kidding This Time

With the change in weights and base years that DOS made with the CPI, I took the opportunity to completely revamp the splicing and weighting procedures I’ve been using previously. I’d been using a mixture of arithmetic and geometric averaging to arrive at index numbers for the component and composite indices; now its all based on geometric averaging…which took some doing. That, some minor error correction, and the complications from having to generate intermediate indexes for splicing, is why this analysis arrives so late.

First a word about the change in weights – DOS tweaks the weightage for each consumption category every five years, based on household expenditure surveys. That means you can use the weights to provide a snapshot of what the median Malaysian household actually spends on (click on the graph for a larger version):


January 2011 CPI

My analysis of this will be late.

As is customary every five years, the Department of Statistic have updated the weights and reset the Consumer Price Index to 2010 prices, which means a heck of a lot of spreadsheet work for me over the next couple of days.

In the meantime, you can read the highlights here.

Wednesday, February 23, 2011

December 2010 Employment Report

As I thought, employment jumped in December – just don’t get too excited because it’s hardly likely to last (‘000):


Monday, February 21, 2011

A Worthy Experiment: The EU Contemplates A Tobin Tax

So says the Forex Blog (excerpt):

EU Ponders Tobin Tax

Only two years after the worst financial crisis in decades, the DJIA is now back above 12,000. Yield-hungry investors are pouring record amounts of cash into emerging markets. Commodities and food prices are rising into bubble territory. In fact, not a single meaningful reform has yet to be passed that would prevent such an event from erupting again. The EU, however, is trying to change that, with the proposed introduction of the first-ever Tobin tax on foreign exchange trades...

...The so-called Tobin tax was first proposed in 1971 by Nobel Laureate James Tobin. While it has always enjoyed support from a handful of leftist economists, it has never been seriously considered by any western country. In the wake of the financial crisis, however, anger towards speculation seems to be peaking, and some governments might finally have enough political capital to push forward the idea. In fact, France has already obtained the tepid support of other EU members, notably Austria. In addition, the Economic and Monetary Affairs Committee of the European Parliament has backed the idea. The EU is fighting to keep the Euro alive and its member states solvent, and it clearly resents the (perceived) role of speculators in betting on default and breakup.

Proponents of the Tobin tax generally cite the amount of revenue it could raise as its chief benefit. For example, it has been estimated that a .005% on forex transactions could raise $26 Billion worldwide, while a .05% tax on all financial transactions could generate as much as $700 Billion in revenue. Even though studies suggest that it wouldn’t do much to reduce volatility (and perhaps speculation), the fact that it shouldn’t destabilize markets is enough to satisfy some of its naysayers.

Not surprisingly, the US remains opposed to such a policy, on the grounds that it could “send misleading signals that could hamper investment to end extraction and cause production bottlenecks.” This kind of incantation rings hollow, however, and it’s clear that the biggest obstacle to its being implemented is almost certainly the bank lobby, which has insisted that a Tobin tax would “cause serious damage to this highly efficient [forex] market.”

In Defense of EPF

Strictly speaking this post isn’t about economics, but the reaction to EPF’s dividend announcement is a good argument for greater financial literacy:

Good, but it could be better, groups comment on EPF dividend rate

PETALING JAYA: EPF’s 5.8% dividend rate has been lauded, but some say the amount should have been even higher, given its large investments and the higher dividends offered by other funds and unit trusts.

Consumer activist and Federation of Malaysian Consumer Associations (Fomca) adviser Prof Datuk Dr Hamdan Adnan said the increase was good as it showed the economy was picking up.

However, he said it could have been higher, given EPF’s long-term existence and the dividend performance of other funds, which were not as old as EPF.

“We are glad it is higher. But there are funds that are offering dividends of between 8% and 10%. Even Amanah Saham Bumiputra is offering almost 9%. EPF is not even giving bonuses like trust funds do.

When Does A Minimum Wage Start Having Unemployment Effects?

According to Mike Moffat and Stephen Gordon, when it exceeds 40% of the average wage (excerpt):

Reconciling the Minimum Wage Literature

…There are dozens of studies that show increasing the minimum wage has an adverse effect on employment. However, Card and Kreuger (1993) and an excellent paper shared by Erin Weir, Dube, Lester, and Reich (2010) show that there is no reduction in employment when the minimum wage is raised. How can we possibly reconcile this?

There are a few ways. Back in 2006 Stephen Gordon wrote a blog piece When the minimum wage bites which looked at the work of Pierre Fortin (and others) and concluded:

“So what have we learned from all this?

  1. When minimum wages are 'low' - say, less than 40% of the average hourly wage - then moderate increases won't have a significant short-run effect on employment.
  2. When minimum wages are around 45% of the average, they significantly reduce employment.”

Saturday, February 19, 2011

Everything You Wanted To Know About Central Bank Reserve Requirements…And Then Some

A new IMF working paper discusses reserve requirements and the role they play in liquidity management and monetary policy (abstract):

Central Bank Balances and Reserve Requirements
Simon Gray

Most central banks oblige depository institutions to hold minimum reserves against their liabilities, predominantly in the form of balances at the central bank. The role of these reserve requirements has evolved significantly over time. The overlay of changing purposes and practices has the result that it is not always fully clear what the current purpose of reserve requirements is, and this necessarily complicates thinking about how a reserve regime should be structured. This paper describes three main purposes for reserve requirements – prudential, monetary control and liquidity management – and suggests best practice for the structure of a reserves regime. Finally, the paper illustrates current practices using a 2010 IMF survey of 121 central banks.

Friday, February 18, 2011

4Q 2010 GDP: Bigger Bounce Than Expected

You’ll hear and read tomorrow that economic growth moderated further in 4Q 2010, reaching 4.8% after 3Q’s 5.3%. And so it appears from a year-on-year basis (log annual changes):


Trade growth dropped into low single digit territory, while public consumption was flat. Impetus for growth came from private consumption and investment – both welcome news, as the transformation of the economy to high income status requires just that. Full year growth reached 7.2%, quite a bit better than my forecast and the consensus estimate of 7.0%.

Are We Creating A Malaysian Sub-Prime Market?

Also from Monday’s news (excerpt):

No-deposit housing package for low, middle income group

KUALA LUMPUR: Syarikat Perumahan Negara Berhad (SPNB) will launch a mega nationwide promotion, offering 10-30percent discount to attract prospective buyers for houses priced between RM35,000 to RM250,000.

The houses will be offered to low and medium wage earners who will not have to pay a deposit to own such houses.

SPNB managing director Datuk Dr Sr Kamarul Rashdan Salleh said he was confident of achieving the targetted sales of 6,300 houses for the year, through the promotion.

"In 2010, SPNB sold about 3,000 units worth about RM400mil, and made a pre-tax profit of about RM15mil.

"Based on last year's success, SPNB is confident that sales this year will double since we are going to sell in cooperation with Cagamas Berhad (Cagamas), while offering an attractive package, including, a discount of between 10-30percent - depending on the location - along with free legal services.

"Apart from Cagamas Berhad, Malaysia Building Society Bhd and Bank Simpanan Nasional (BSN) are also involved," he told Bernama in an interview here Monday.

Minimum Wage Lab: National Wages Consultative Council To Consider Single Minimum Wage Rate

From Monday’s The Star (excerpt):

Single minimum wage proposal for all sectors, locals and foreign workers

PUTRAJAYA: The soon-to-be set up National Wages Consultative Council will look into a proposal for a single minimum wage instead of one for each sector.

Human Resources Minister Datuk Dr S. Subramaniam said on Monday that this was among pointers discussed by the various stakeholders during a week-long “live lab” on the issue.

He said the proposal was for one minimum wage for employees in the peninsular and another for Sabah and Sarawak.

Though I'm still in two minds about having a minimum wage in the first place, if we must have one, let's do it properly. A single wage rate has some advantages, especially since it substantially simplifies administration and enforcement.

Wednesday, February 16, 2011

Assessing Forecasts

Ages ago, as this blog goes, I did a post on the pitfalls of econometrics. It’s as valid today as it was 2 years ago when I wrote it.

What brings this up is a really great post by etheorist on systemic change (and his approach to forecasting), and Greg Easterbrook’s annual Bad Predictions Review (excerpt):

…Michael Wilbon, then of The Washington Post, predicted the Steelers would not make the playoffs, as did the New York Post. Gene Collier of the Pittsburgh Post-Gazette predicted the Steelers "look like maybe a 6-win team." Adam Schein of Fox Sports predicted Pittsburgh would miss the playoffs. The Steelers made the Super Bowl.

None of USA Today's eight preseason predictions had Pittsburgh reaching the Super Bowl. Three USA Today predictors forecast Mike Singletary as coach of the year, one forecast Wade Phillips as coach of the year; both were fired.

December 2010 Industrial Production: Up On Manufacturing

Last week’s IPI report supports the case for a bounce in economic activity in 4Q 2010 (log annual and monthly changes; seasonally adjusted):



Monday, February 14, 2011

Risk, Return And The Perfidious Banker

Just a quick post to a question posed by Wenger J Khairy in my post on SRR:

Why is the bank sitting pretty on a pile of cash?

I think the answer has to be the huge almost titanic differential between cost of funds (deposit rate) vs. the BLR. I think the spread is like 400 bps, something which makes it very easy to be a banker and very crappy to be a consumer. So banks don't have to stretch to be profitable, just lend to the consumers and earn the differential

This is a fair concern, especially in light of the charges levelled at the Federal Reserve during this past crisis – by keeping interest rates at near 0% and inviting banks to borrow against all sorts of collateral, coupled with record issuance of US Treasury Bills, meant that US banks had an almost risk free way to gain profits. 30 year Treasuries were yielding over 3% in 2009, and over 4.7% currently. Nice business if you can get it.

December 2010 Monetary Conditions

This post is over two weeks late, but what with CNY and other news taking centre stage, plus because this post looks at conditions near two months ago, I think that’s a little allowable.

Money supply growth was mostly stable in December, though seasonally adjusted annual M2 growth slowed to 6.9% in log terms (log annual and monthly changes; seasonally adjusted):


The Future is Hot

I tend to avoid making market calls (its a no-win game), but I did make an off-hand prediction about the pepper market two years ago:

World production shortfall pushes prices of pepper to new heights

KUCHING: Malaysian pepper prices, which soared by nearly 30% last year, are expected to remain firm in 2011 and 2012 due to projected decline in world production.

Malaysian Pepper Board director-general Grunsin Ayom said that based on International Pepper Community's (IPC) forecast, world production would dip by about 2% to 309,952 tonnes this year compared to an estimated 316,380 tonnes (251,980 tonnes for black and 64,400 tonnes for white) harvested by more than a dozen producing countries in 2010.

Thursday, February 10, 2011

SRR To Cool Hot Money Flows…Not

This one’s making a mountain of a molehill (excerpt; emphasis added):

Worries over SRR hike impact on loans

Statutory reserve requirement may be raised to curb hot money

KUALA LUMPUR: There are fears in the banking and finance sector that a hike in the statutory reserve requirement (SRR) to cool hot money inflow may impact loan activity and result in an economic slowdown.

Bank Negara's SRR, which is currently set at 1%, is the amount of money that all the country's commercial, investment and Islamic Banks must set aside and lodge with it.

Wednesday, February 9, 2011

Visualising Demographic Transitions

This site is gorgeous – you can actually see how the age profile of a population evolves over time.

To use, click on the alphabet to expand the country list, then click on the country and a date. The site generates the population tree automatically (works with non-Flash browsers, too) – successive clicking on dates causes the population tree image to transition smoothly (click on link for bigger pic):


The Impact Of Financial Liberalisation

I usually publish only the abstracts when highlighting research papers, but this one’s so fascinating and not a little controversial from a Malaysian perspective, that I’m taking excerpts from the introduction instead (excerpts, emphasis added):

Rethinking The Effects Of Financial Liberalization
Fernando A. Broner & Jaume Ventura

...The conventional view, part of the so-called Washington Consensus, was quite optimistic regarding the effects of financial liberalization...

New World Bank Publication Discusses The Future Of Economic Policy

From the World Bank blog (excerpts):

The Day After Tomorrow: Macro-Financial Policy Catches Up With Reality

The 2008–09 crisis opened the door to a different kind of thinking in international macroeconomics—and closed it on some of the previous orthodoxy. Let’s take a look at some of the most obvious cases.

First, some now see a bit of inflation (perhaps as high as 5 percent per year) as desirable for countries that pursue inflation targets, because it would allow more space to reduce nominal interest rates when an economy falls in recession. In fact, what to target (e.g., consumer, producer, asset, housing, or other prices) is the question.

Second, regulatory parameters and practices in the financial sector have proved to be more critical for real growth than we previously thought, whether through systemic risk, over-lending, costly bailouts, or other channels. Floating exchange rate regimes are falling out of favor, since “managed” ones proved to be better at controlling inflation and reducing sudden, unnecessary fluctuations. Controls on the movement of capital across boundaries have become an acceptable tool (they used to be heretical), almost the price to pay for policy success.

Third, multilateral surveillance is in the cards, initially through the G-20, since the actions of hard-hit, over indebted rich countries cause volatility in many emerging markets. But fiscal policy advice is bifurcated—between a short-term need for sustained stimulus and a medium-term need for consolidation, and between massive deficits in the developed world and the accumulation of surpluses in sovereign funds in the developing one.

From all this, a new paradigm is likely to rise…

…The bottom line is that the search for financial stability, through regulatory or macroeconomic policy, is just beginning. This is putting developing countries in a bind. Should they wait for new global standards to emerge, or should they tailor their own regulatory strategies? Stay tuned.

Tuesday, February 8, 2011

Ringgit High

This is a quickie update, as I haven’t time for a full work up (look for that next week), but the news of the Ringgit hitting a new high needs some perspective:

Ringgit hits new 13-year high

KUALA LUMPUR: The Malaysian ringgit hit a new 13-year high of 3.0345 in intra-day trading yesterday before ending trade at 3.036.

A local wire service quoted a currency trader as saying the new high was driven by speculation that Asian central banks may raise interest rates to curb inflationary pressures and the continued demand for the local currency.

An AmBank Group report said yesterday that the ringgit's strength was precipitated by stronger-than-expected December export data, as manufacturers shipped more palm oil and petroleum products to customers in South-East Asia and Japan.

CUEPACS Asking For Minimum Wage

Though I’m in two minds about the implementation of a Malaysian minimum wage, government workers union CUEPACS has a point:

Cuepacs wants minimum wage policy for civil servants

KUALA LUMPUR: Cuepacs has called on the Government to implement a minimum wage policy in the civil service to help civil servants cope with the rising cost of living.

Its president Datuk Omar Osman said at the moment, the salary received by those in the support group was below the poverty line of RM720 a month.

"Those in Grade 1 to Grade 16 in the Support Group II are starting at RM647 per month, which is below the poverty line. The basic salary should be at least RM850 or RM920 a month," he told reporters after attending an integrity workshop for the Peninsular Malaysia road transport union here Monday.

He added that a low salary would affect productivity, especially among those who had to find part-time jobs to make ends meet...

Monday, February 7, 2011

December 2010 External Trade: Christmas Surprise

I’m back from my CNY break, and will you look at the news on the wire:

Malaysia's December exports far above economists’ expectations

PETALING JAYA: Malaysia's exports for the month of December 2010 grew 4.6% from a year ago.

This was largely contributed by higher exports of palm oil, refined petroleum products, chemicals and chemical products, manufactures of metal, crude rubber, iron and steel products as well as optical and scientific equipment.

The figure was far above economists' expectations of a median 0.9% contraction in a Bloomberg survey while economists who spoke to StarBiz recently expected flat to very low single-digit exports growth.

Wednesday, February 2, 2011

Happy Chinese New Year

There won’t be any posts this week, as I’m off travelling. In the meantime, as we leave the Tiger and welcome the Rabbit, Happy Chinese New Year! And drive safely.