Close But No Cigar

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

The alchemy of money
BY ANDREW SHENG

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

The Fallacy of Composition and the Monetary System

I was tempted to be snarky about this, but that wouldn’t be fair, on laymen or anybody else.

It’s not easy thinking through economic problems, and monetary problems in particular. Slip ups are common, even among seasoned economists. It doesn’t help that standard texts on money and banking are badly wrong on how banks actually operate and how money is created. It’s no wonder then that people have a hard time figuring out what’s going on, and how changes in policy and customer preferences affect the monetary system.

Example 1 comes from a couple of weeks ago (excerpt):

BNM Watch: OPR Unchanged, But Not For Long

Last week’s Monetary Policy Committee statement made very clear that policy tightening of some sort or another is on the way (excerpt; emphasis added):

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.

Global growth moderated in the first quarter with several key economies affected by weather-related and policy-induced factors. Looking ahead, the global economy is expected to remain on a path of gradual recovery….

…For Malaysia, latest indicators suggest that the domestic economy continued to register favourable performance in the first quarter. Going forward, growth will remain anchored by domestic demand with additional support from the improved external environment….

…Inflation has stabilised in recent months amid the more favourable weather conditions and as the impact of the price adjustments for utilities and energy moderate. Going forward, inflation is, however, expected to remain above its long-run average due to the higher domestic cost factors.

Amid the firm growth prospects and inflation remaining above its long-run average, there are signs of the continued build-up of financial imbalances. While the macro and micro prudential measures have had a moderating impact on the growth of household indebtedness, the current monetary and financial conditions could lead to a broader build up in economic and financial imbalances. Going forward, the degree of monetary accommodation may need to be adjusted to ensure that the risks arising from the accumulation of these imbalances would not undermine the growth prospects of the Malaysian economy.

The key paragraph is the last one, with its ominous warning of “degree of monetary accommodation may need to be adjusted”. That’s about as clear a signal as can be given.

March 2014 Monetary Conditions

Monetary conditions in March appear to have tightened (log annual and monthly changes; seasonally adjusted):

M2 growth fell to 6.0% yoy, which is more than a little worrying – as a rule of thumb, you want to see money growth approximate real growth plus inflation. Having said that, real indicators have been pretty strong, and loan applications (demand) and especially approvals (supply) look decent; these imply that much of the drop off in money growth is coming from other components of M2.

February 2014 Monetary Conditions

I was really concerned when I first heard the news last week. After having a peek at the data, I’m don’t feel much better (log annual and monthly changes):

M2 growth is pretty weak at a tad over 6%, even after taking into account CNY effects. Overall, money supply growth has been below 8% for the last eight months. That’s uncomfortably low – lower than I’d like it to be. It implies either slower growth, or disinflationary pressure.

Structural Break In Monetary And Financial Data

BNM is making my life, and the lives of every economist in town, a bit more complicated (excerpt, emphasis added):

Adoption of International Financial Reporting Standards for monetary and banking data in the Monthly Statistical Bulletin (Latest Updates: 28 February 2014)

Bank Negara Malaysia is pleased to inform that starting with the December 2013 issue of the Monthly Statistical Bulletin (MSB), the set of Monetary and Banking data pertaining to the balance sheets of financial institutions (excluding tables related to loans/financing) has been revised from 2007 onwards….

...Nevertheless, users should recognise that there is a break in the historical trend between December 2012 and January 2013, especially when studying components at a more granular level.

For Monetary Aggregates (Tables 1.3, 1.3.1 and 1.3.2), data items where possible, have been aligned to meet the existing conceptual definitions. Starting January 2014, the compilation uses data collected based on the new taxonomy, which will result in a break in the historical series. In order to facilitate trend analysis, a one year back series data consistent with January 2014 has been published in the MSB.

The data revisions are all to the good, especially since it will help with cross-country comparisons.

but some of these changes will give me big headaches, especially the change in reporting from a gross to a net basis for bank balance sheets. It looks minor at a 2%-3%, but you’re fastidious about the data you use, stuff like this can drive you up the wall. There’s a half percent difference in monetary aggregates (between RM4-9b) between the old series and the new one as well. No wonder the reported growth rates looked a bit funny this month.

Oh well, there’s no stopping progress…

November 2013 Monetary Conditions

Happy New Year!

I’ve taken a break from writing about Malaysia’s monetary environment for a few months now, as it was getting boring and a bit too much like work. But a lot has happened in the last couple of months, and things are getting interesting again.

Interest rates have taken a roller coaster ride since April 2013, when the rumours about the Federal Reserve planning a pullback in its QEIII program started circulating. Speculation has now turned to reality, though since the formal announcement occurred in mid-December, we won’t see the full impact until the December figures are in at the end of this month.

Making Money

I love this – the modern history of money in 315 words:

“…On a desert island gold is worthless. Food gets you through times of no gold much better than gold gets you through times of no food. If it comes to that, gold is worthless in a goldmine, too. The medium of exchange in a gold mine is the pickax.

Hmm. Moist stared at the bill. What does it need to make it worth ten thousand dollars? The seal and signature of Cosmo, that’s what. Everyone knows he’s good for it. Good for nothing but money, the bastard.

The Endogenity Of Money

I’ve been meaning to write a post about my…conversion…to endogenous money theory for many moons now, but its always been on the back burner. The reason why I think endogenous money is important is because conceptually, it provides a much more accurate view of how the financial and monetary system in the modern era actually works.

And the reason why I’m posting about it now is because somebody did a remarkably good summary of endogenous money theory (excerpt):

Endogenous Money 101

Money is at the centre of all modern capitalist economies. Understanding its nature and origins is therefore of great importance. At the heart of Post Keynesian monetary theory is the idea of endogenous money.

This is opposed to the mainstream exogenous money supply theory: the idea that the central bank has direct control over the money supply and its growth. The latter theory is wrong, and I review that major points of endogenous money below.

March 2013 Monetary Conditions

Apropos of the Monetary Policy Committee Meeting last week, monetary conditions in Malaysia for 2013 up to March mirror developments in prices and incomes (log annual and monthly changes; seasonally adjusted):

BNM Watch: The Nature Of Money

Some of this discussion may be pretty esoteric to the layman, even if on the face of it the changes BNM are implementing look pretty simple and straightforward. I don’t know if I can fully understand all the ramifications myself, and this whole post is probably sheer speculation.

Nevertheless, the changes in forex administration rules for instance are pretty easy to absorb (full list available here). Basically, the measures liberalise the depth and scope of forex services and products that can be offered to both residents and non-residents via the onshore market, including by FIs based in Labuan (something IIRC not previously allowed).

December 2012 Monetary Conditions

The other day, I characterised monetary conditions as boring – seems I might have spoken too soon. What is going on in the interbank and money markets? (RM millions)

Trading volume on the money market for 2012 (which covers MGS, T-Bills, BNM Bills, NIDs and BAs – I know, that’s a lot of acronyms) is a quarter below the average of 2011. December 2012 trading volume was just RM21.5 billion, which is less than half the average for 2012 – much of the drop has occurred in the last two months of the year.

November 2012 Monetary Conditions

One of the toughest challenges a writer can face is overcoming writer’s block – it’s hard to start writing again once you’ve stopped for a while. It’s even harder when there’s not much to write about, as Malaysian data over the past couple of months have been indicating an economy that’s been cruising along (in other words, b-o-o-oring).

So here’s my attempt at getting things going again. There’s all sorts of stuff I plan on covering, but it might take a while to get around to all of them, especially with my present work load (I’m currently working, among other things, on a country profile for a GCC member – not exactly helpful for thinking about the Malaysian economy).

In any case, here goes:

October 2012 Monetary Conditions

I was looking at liquidity conditions, and found something interesting, but I’ll get to that in a bit. M1 growth decelerated sharply in October, although M2 showed a slight uptick in growth (log annual and monthly changes; seasonally adjusted):

September 2012 Monetary Conditions

I haven’t done one of these in quite a while, mostly through sheer lack of time, but given the upcoming Monetary Policy Committee meeting this Thursday, now is as good time as any to reboot.

Over the last quarter, broad money supply growth has fallen off (log annual and monthly changes; seasonally adjusted):

OMG! QE3 To Boost Inflation…Not

The Federal Reserve Open Market Committee yesterday announced a third round of quantitative easing (excerpt; emphasis added):

FOMC Statement

…The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative…

Basically, the Fed is committing to increase its balance sheet size by USD85 billion every month – sounds like a lot, but its actually only about a 11.3% expansion of the Federal Reserve system’s USD2.8 trillion consolidated balance sheet from now until the end of the year.

(Details in the Fed’s plans are available here).

May 2012 Monetary Conditions

Local monetary conditions in May appeared to be a little tighter, though growth in M2 looks to be within a “normal” pace of activity (log annual and monthly changes; seasonally adjusted):

M1 growth crashed however on a monthly basis, largely from a drop-off in demand deposits. Broad money growth was better, but only due to higher savings deposits offsetting falls in other money substitutes, but particularly in forex deposits.

The End of Cash

Interesting video on BBC magazine:

Life in a cashless society

Author David Wolman says cash is dirty, expensive and should just be pushed off the cliff.

He describes his new book, "The End of Money: Counterfeiters, Preachers, Techies, Dreamers- And The Coming Cashless Society," as a eulogy to these rectangular slips of paper and little metal disks.

But while writing the book, and going without cash for a year, Wolman found that the future of money is about much more than just dollars and cents.

The link goes to a short video (the Beeb makes it hard for others to embed their video). It’s not exactly world breaking news – Japan has had a mobile payment system based on phones for something like a decade now, and cashless payments are popular in Africa (Kenya alone has 20 million users). But it looks like the movement is gaining critical mass.

April 2012 Monetary Conditions [Updated]

Well, I’m back from my break, recharged but thoroughly unrested

But on to last week’s monetary data release from BNM. I haven’t done one of these for a while, as (1) little substantive has changed; and (2) while I’ve been updating the data, I’ve lacked the time to publish a review in a timely manner. Old news is stale news as they say.

Nevertheless, things are heating up (metaphorically) in a monetary sense. With Europe back in the news, China showing signs of a slowdown, and US recovery losing steam, it’s back to global risk aversion again. And that means global capital outflows into US treasuries (notice that gold hasn’t budged).

We’re only seeing a few signs of this locally though, as money supply growth is pretty stable (log annual and monthly changes; seasonally adjusted):

Gold, Quantitative Easing, And Property Prices In Malaysia

I read this over the weekend:

Applying the brakes – made for the short term – can be dangerous
FOOD FOR THOUGHT
By DATUK ALAN TONG

...Recently there has been a proposal to raise the floor price of properties for foreigners from RM500,000 to RM1mil to curb or control the prices of houses from increasing too fast. This proposal is on top of the other “cooling off” measures such as the 70% housing loan policy for purchase of a third property, the increase of real property gains tax from 5% to 10% imposed on properties sold within two years of the sale and purchase agreement, and the new ruling on housing loan limits based on net income rather than gross.

There is no doubt that the introduced “cooling off” measures have reduced the buying spree of properties. However, the intended objective of these measures to control the price of properties has yet to be seen. Introducing measures without critically identifying the root cause of the increasing property prices may instead create situations that would not be beneficial to the industry as explained by the theory of Risk Homeostasis.

So, what determines rising prices?