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):