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.