QE2: Confusion And Chaos Reigns

I’m struck by the extent of the divisiveness of opinions that the Fed’s announcement last week about a further US$600 billion in asset purchases has raised. And then there’s the fact that the FOMC’s vote on the matter was not unanimous.

But to illustrate the chasm between opinions on the Fed’s “quantitative easing” (aka printing money) program, have a look at these two articles in Bloomberg:

Bernanke Can’t Use ‘Poison as the Cure,’ Burry Says

Nov. 5 (Bloomberg) -- Michael Burry, the former hedge-fund manager who predicted the housing market’s plunge, said Federal Reserve Chairman Ben S. Bernanke is trying to use “poison as the cure” by pumping more cash into the economy to spur growth.

Bernanke’s Fed pledged this week to use $600 billion in additional Treasury purchases to help lower a 9.6 percent unemployment rate, close to a 26-year high, and to avert deflation.

The attempt to bolster growth is reminiscent of Alan Greenspan’s actions to revive the economy after 2001, Burry said in a telephone interview from Cupertino, California. The former Fed chairman helped create an unsustainable boom in U.S. property prices with his policies, leading to the worst global financial crisis since the Great Depression, he said.

Boosting the economy “was the point of inflating the housing bubble,” Burry said yesterday. “It was the intent that the house would become the ATM machine, and help us through those rough times, post-dot-com, -Enron, -WorldCom, -Iraq and - 9/11. That’s why I say they’re using the poison as the cure.” …

Currency Wars Part VII: Jim Rogers Gets It Wrong Again

Well-known economist, academician, theorist, investor and author Jim Rogers says Ben Bernanke doesn’t know what he’s doing:

Bernanke ‘Doesn’t Understand’ Economics, Rogers Says

Nov. 5 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke’s decision to pump a further $600 billion into the economy shows his grasp of economics is weak, said investor Jim Rogers, chairman of Rogers Holdings.

“Dr. Bernanke unfortunately does not understand economics, he does not understand currencies, he does not understand finance,” Rogers, 68, said in a lecture at Oxford University’s Balliol College yesterday. “All he understands is printing money.”

“His whole intellectual career has been based on the study of printing money,” said Rogers, who predicted the start of the global commodities rally in 1999. “Give the guy a printing press, he’s going to run it as fast as he can.”

October 2010 International Reserves

The latest reserves position shows a RM2 billion increase over the last two weeks, indicating the pace of intervention has slowed compared to the first half of October:

As you can see from the MYR-USD exchange rate, there’s no obvious correlation between changes in reserves and the USD exchange rate after the capital flight episode in late 2008:

Bottom-line: BNM has a soft line in the sand at about 3.08 which says “do not cross…for now”. I’d expect that line to be crossed by the end of the year.

Happy Hari Deepavali

To all my Hindu readers, Happy Deepavali!

Please remember to drive safely if you’re travelling.

Thank You

When I first started this blog a year and a half ago, I never expected much to come out of it. My goal was just to have a forum for airing my views and a way to formalise and discipline my thoughts on the economy. I never expected to get the readership that I have now, or to be involved as I am in the online Malaysian community.

Just a few minutes ago, Histats.com reports that since 1 April 2009, Economics Malaysia has hit the 100,000 page views milestone. That’s a heck of a lot of traffic for a specialist blog like this.

So for all my visitors and followers, thank you. I hope you’ve derived some benefit from my doodlings – I’ve certainly enjoyed the process.

I’m especially grateful for those who have put my blog on their blogroll, particularly Rocky, Dato’ Sak, Dali, de Minimis, etheorist and SatD. Couldn’t have done it without you.

And to my wife, thanks for the encouragement and for not complaining too much about the time I spend on line. Love you, babe.

September 2010 External Trade

It’s hard to find anything positive to say about yesterday’s release of September trade numbers. There’s no longer the excuse of a short working month due to Ramadhan (log annual and monthly changes):

BNM Announces 70% LTV For 3rd Mortgages

I’ve been travelling this morning, so posts will be running late today.

As rumoured last week, BNM has announced curbs on property lending, but only for people carrying more than two mortgages:

Measures in Promoting a Stable and Sustainable Property Market and Sound Financial and Debt Management of Households

Bank Negara Malaysia wishes to announce with immediate effect the implementation of a maximum loan-to-value (LTV) ratio of 70%, which will be applicable to the third house financing facility taken out by a borrower. Financing facilities for purchase of the first and second homes are not affected and borrowers will continue to be able to obtain financing for these purchases at the present prevailing LTV level applied by individual banks based on their internal credit policies…

Warisan Merdeka, KLFID, And The Demand For Office Space In Kuala Lumpur

Although announced as part of the government’s 2011 budget proposals, neither the RM5 billion Warisan Merdeka (to be developed by Permodalan Nasional Berhad) nor the RM26 billion Kuala Lumpur International Financial District (to be jointly developed by 1Malaysia Development Berhad and Abu Dhabi’s Mubadala Group) are strictly speaking government projects, although the latter skirts a very fine line on that issue.

There’s a lot of opposition to both projects, but funnily enough, it’s Warisan Merdeka that has attracted the most vitriol despite being less in scope and risk, and despite PNB not being directly owned by the government. I guess its the inclusion of a 100 story office tower that has raised people’s hackles, and the prospect of a 5-10 year development in one of the worst traffic areas of the city.

But the real issue here is the viability and feasibility of both projects – will there be enough demand to absorb the inclusion of so much additional office and commercial space?

There He Goes Again…

Tun Dr Mahathir on free markets, regulation and gold:

Dr M: Banking, finance need to be regulated

…Former prime minister Tun Dr Mahathir Mohamad said governments must continue to oversee the regulation of banks and financial institutions.

“Unless the Government oversees and limits the ability for the market to abuse (the banking systems) then, of course, we are going to have this kind of (global economic) crisis…

…“This idea of a free market has become almost like a religion. You cannot question it, even when it fails,” he said…

…“And the abuses became rampant because of the idea that governments must not interfere with the financial market. (That) the market it seems would regulate itself,” he explained.

He urged for the gold dinar to be institutionalised as the standard against which all currencies were measured for the sake of stability.

“It’s something tangible and something that has value anywhere in the world,” he said.

However, he said the gold dinar system, if implemented, should only be used for settlements of international trade…

…“The US dollar has got no value whatsoever. It’s got no backing, no reserve. But we accept it as if it has some value and because we accept it, it has value,” he said.

RON97 Petrol Up 5 sen From Today

Unlike the subsidised price of RON95 petrol, RON97 is apparently priced according to a “automatic pricing mechanism”:

RON 97 price up 5 sen and reflects global petrol market price

KUALA LUMPUR: The price of RON 97 is up 5 sen to RM2.15 per litre from Tuesday and reflects the price of petrol in the global market, said Deputy Domestic Trade, Co-operative and Consumerim Minister Datuk Rohani Abdul Karim.

The price of the more widely used RON 95 remains at RM1.85 per litre.

"It was announced on July 16 that the price of Ron 97 will be subjected to a managed float,'' she said this in her reply to Dr Dzulkefly Ahmad (PAS - Kuala Selangor) during Question Time.

A market oriented mechanism is superior to price controls. But even this isn’t sufficient to offset the negative externalities (pollution, congestion, etc) arising from the use of fossil fuels.

Please, tax the stuff.

Sept 2010 Monetary Conditions Update

Monetary conditions were more or less stable over the past few months, but with narrow money falling as BNM took in old notes and coins in the aftermath of Ramadhan (log annual and monthly changes; seasonally adjusted):

Wealth, Income and Education

I’m swamped with work today, so this will be a filler post to tide you guys over until I can get into meatier things.

I’ve been advocating more attention be paid to the early years of education, rather than focusing primarily on tertiary education, as I believe its a more effective way to create a more productive Malaysian workforce.

Here’s some supporting evidence (abstract):

How Does Your Kindergarten Classroom Affect Your Earnings? Evidence From Project STAR
Raj Chetty, John N. Friedman, Nathaniel Hilger, Emmanuel Saez, Diane Whitmore Schanzenbach, Danny Yagan