Economic woes will be our biggest headache

US economy has probably gone into deflation. The latest Consumer Price Index is -1% , marking perhaps the beginning of deflation. Please do not think that deflation is good, even though deflation has been defined as a persistent reduction in the level of prices of goods.

Deflation may lead to economic depression. Since the prices of goods are persistently becoming lower, people will defer any purchase, and that reduces demand for goods. The whole economic activity will therefore slow down. With slowly down of economy, prices of goods tend to go down further , thus forming a spiral in which recovery can be difficult and end result is a prolonged depression.

Worse, since many companies and factories will go bust, unemployment will increase. Even those companies that are able to continue to do business may have to resort to downsizing, and retrenching their workers. In the Great Depression of the 1930s, unemployment rate went up to 25%, which means that 0one in 4 of the workforce has no job…And when people are hungry, all sorts of social problems will erupt.

With economic activities slowing down in the United States, Europe and Japan, demand for goods manufactured in Asia as well as demand for services will be reduced, and Asian countries which depend on exports to these countries will suffer greatly. These will include SIngapore and unfortunately, Malaysia as well.

In Malaysia, economic woes will be our biggest headache in 2009.  

A friend was complaining to me that life is getting tougher and tougher and he is finding difficulties in making ends meet. He lamented that when the petrol prices went up 40 %, his petrol bill went up by almost a hundred dollars but he was still able to ‘tahan’, and now that petrol prices have come down, he is finding it even more difficult to make ends meet even though he is now footing less for his petrol compared to 3 months ago. I told him that when the petrol pump prices were hiked up 40 % from 1.92 to 2.70, the whole economy has adjusted within a short time to 2.70 level, with prices of goods and services shot up. Inflation was officially 8 % but I suspect it is even more than that.

NOw even though petrol may come down to 1.85- cheaper than before- do not hope for goods to return to 1.92 level, unless of course deflation sets in, and that will be a real worry for Malaysia.  I told him that when economy contracts, companies will become insolvent, and that will lead to banks becoming insolvent. Asset prices will drop and everyone with property will become poorer as a result. Money supply will shrink. People will think twice to save money in banks , fearing that banks may go bust and they would seek alternatives such as gold. With less deposits, there will be less funds to lend,and economic activities will come down further.

To counter that, government may need to spend to stimulate economy. The problem in our country is that with commodity prices dropping (palm oil from 4500 to 1450 recently), the govenrment will be hard pressed to find funds to spend. By cutting EPF contibution in the hope of stimulate people to spend more to counter recession is not enough.

It is perhaps imperative now for the government to reduce taxes to stimulate private consumption and hope that this will prevent economy to go into a recession.  Cutting taxes however will reduce government revenue, and with operationg expenditure so highas a proportion of our total budget, a meaningful cut may not even be feasible. The operating expenditure must be trimmed if we want to cut taxes to stimulate private consumption.

At the same time, perhaps it is now time to do away with NEP, since allowing market forces to act without any distortion will be more efficient and will lead to more private investments by those who are still holding plenty of cash.

This is the time to act and act decisively.

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20 Comments (+add yours?)

  1. jason
    Nov 25, 2008 @ 00:56:55

    more to come , Singapore government said that this is the worst since 30 years ago. I can feel the impact with my costumer already. See how we survive through this crisis , good luck, anyway doctor may not have problem , because human will sick and especially under stress hahah

    Like

  2. CYC
    Nov 25, 2008 @ 11:26:21

    Economics is a study of human behavior in relation to utilization of goods. Since our politician can apprehend the rakyats thought, it will be difficult for them to strategies a workable solution. What more when burdened with so much of political baggage.

    My take is the government should do 3 things :
    1. Preserve confidence of the rakyat. All this while we often hear that our economy will not be affected by the global downturn which is a fancy dream. Do away with all political consideration and face the problem and keep the rakyat informed of the exact scenario with clarity. People tend to be able to adjust themselves with a clear mind rather than a confused mind.

    2. Look at the problem in total and plan in co-ordinated manner. This is important because if we start to remedy the problem in ad-hoc basis, we will never able to solve it as this is a global issue. Engage with opposition and leaders from all sectors of the economy to strategise an effective plan that represent consensus of all rakyats.

    3. Stimulus package or whatever being planned should be implemented with urgency and no leakages should be tolerated. End result is all rakyat should be able to “feel” the real effect rather than merely pro business to avoid bankruptcy of certain personality.

    My 2 cents of input.

    Like

  3. A true Malaysian
    Nov 25, 2008 @ 12:18:50

    The problem with Malaysian government is that there are many people in civil services, GLC are getting ‘Gaji Buta’. These people have no economic value at all and they are a huge burden to Malaysia.

    These gaji buta form consist a very big part of expenditure but do not contribute to the overall economy of Malaysia. The government should get rid of these ‘gaji buta’ by retrenching these people, compensate them with retrenchment benefits. No doubt this will cause problem in the short term as unemployment rate will increase, but with the retrenchment benefits, these people can venture into something that will benefit them in the long run, and in turn, will contribute positively to the economy as a whole.

    The best management of economy is the cut of unproductive ventures, stop leakages of fund and let the economy forces strike its balance. Money from tax payers should be spent on productive means, instead of ‘feeding’ these ‘gaji buta’.

    Like

  4. Dr Hsu
    Nov 25, 2008 @ 13:17:31

    We looked at US in the 70s. The economy then was facing stagnation. Reagan took over, began a series of tax cut, and spent spent spent. The end results : almst a decade of prosperity. there is however a caveat. The deficits built up, which resulted in George Bush senior having to face all the problems of big deficits- regening on his famous promise- read my lip, no new taxes- and he has to raise taxes to combat the incresing deficits..

    Clinton did well to cut deficits and put the economy on healthy footing again.

    What Malaysia needs now is to cut our operating expenditure which is about 154billion, double what it was just 4 yeara ago. This is 75% of the total spending of 208 billion.
    Our commodities and oil prices have come down so much so maybe we are now 30-40 billions short of what was expected in Budget 2009.

    With this drop in revenue, if we do not cut the operating expenses, there will be no money for development.

    I propose that the government must cut operating expenses by at least 20 billion, and uses these cut to cushion a drop of revenue by having a tax cut to stimulate private consumption as well as increase spending.

    Channel the 5 billion to valucap to development projects instead that are urgently needed.

    Have an austerity drive to save a few billion to establish a safety net for the poor.

    Abolish the NEP so that stumbling blocks to our economy can be removed and let free market forces act . We must remove all stumbling blocks that are impeding our competitiveness and NEP is the main cause.

    Adopt a fiscal policy of low lending rate with a cut in our interest rate. Soft loans with strict monitoring to banks to lend out to well run legitimate businesses to tie them over the crisis.

    Bank negera did the right thing to guarantee all deposits in banks. This will ensure stability of financial institution and prevent fear and panic.

    As a lay person with no formal economic lessons, these are the things that I work out with common sense. Afterall, economics is about using common sense to manage dollars and cents.

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  5. Dr Hsu
    Nov 25, 2008 @ 13:32:25

    Stock market is important ,too. But we can try to prop up the market alittle by giving incentives in tax break for listed companies to buy back their shares. These so-called treasury shares can then be given back to investors, hence boosing investors confidence as well as maintaining share prices.

    To channel money to valucap to save companies is like givin bread to some starving rats– you feed them and they will come back to eat everything that you have!

    Like

  6. A true Malaysian
    Nov 25, 2008 @ 15:59:53

    Malaysia is in need of a doctor to ‘doctor’ the economy ills and Dr. Hsu fits in well in this role. In principle, managing an economy is basically like managing a household. That is to ‘spend within our means’.

    Just imagine if a household practises ‘favouritism’ where a member who can excel in study is not given ‘family scholarship’ to him / her, instead, given to another ‘favoured member’ who has no interest in study, what will be the expected ‘end result’? The ‘family scholarship’ will be wasted and ‘external loan’ used to finance the ‘family scholarship’ couldn’t be paid back. Further, is the ‘favoured member’ cannot find him / her a job, the household need to pay him / her ‘Gaji Buta’ as what I commented earlier. The household may come to a point where it couldn’t support further the ‘favoured member’ and gone bust in time to come.

    The household may decides to ‘disown’ the favoured member, giving him / her a sum of money to learn a trade and start a small business. If he / she succeeded, the ‘family scholarship’ will be recovered, loan paid and extra income flowing into this household after loan fully paid up, and the economy of this household will be lifted to higher level.

    If he / she not succeeded, at least the household expenditure will be reduced and cashflow will not be so ‘tight’.

    The above are just a few of the scenarios that are happening to Malaysia and hope to see our government realise the logic and go back to ‘basic’ and not reach the point of ‘gone bust’. The ‘basic’ here means ‘meritocracy’ and not ‘favouritism’.

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  7. petestop
    Nov 25, 2008 @ 17:01:15

    Can we start by doing away with the PLUS tool booth operator who is just handing out the tickets?

    These are all young Malaysian 20-ish, at most early 30s. Don’t they every think if they would like to hand out tickets for the rest of their life ?

    Why not move up the value chain, do away with the manual ticketing to machine ticketing (they already have a machine in the booth doing so anyway).

    Instead, they should learn how to maintain these machine first, and later design and develop such machines. In time, we could even be selling such machines to other countries, instead of keep importing such machines.

    It really irks me everytime I see all these young Malaysian wasting their life, handing out PLUS tickets.

    The thing is, I know that they will but drag the country down as they and eventually their offsprings will be a further burden on the taxpayer, instead of becoming a positive contributor to the country’s income.

    Is’nt this plain enough to see ?

    Like

  8. robertchai48
    Nov 25, 2008 @ 18:05:57

    We need to take care of our people in Malaysia. Imagine with a big numbers of foreigner workers in our country, where our young one will get their job? Our government need to encourage our people to spend what is necessary to push up the supply chain. Maybe we can encourage our youth to take up agriculture venture to boost up our food production.

    No doubt, our economic woes will be our biggest headache. We need more proactive action to encourage economic growth by regulate the economic policies in our country. Maybe it can push up FDI coming in our shore.

    Like

  9. Justin Choo
    Nov 25, 2008 @ 18:07:12

    Economics or no economics. Prices up we are in trouble. Now the good news, prices down we are also in trouble. As far as I am concerned the lower the prices the better for me.

    A simpleton like me use simple logic. Now RM 10 can by me two meals. When prices are down, RM 10 can buy me 4 meals. No matter how stupid I am, I am very happy with this.

    Now will some smart Ah Beng teach me to use my stupid head a little better, so that I won’t be too happy paying less for my meals!!!.

    Like

  10. Dr Hsu
    Nov 25, 2008 @ 22:38:34

    Justin, if you have the money, prices down will be good news.

    But deflation itself is bad news. Prices go down because of lack of demand. Profits margin will be trimmed because of poor demand. Businesses will be earning less. People will be retrenched to cut down pverhead.

    It will come to a stage where prices are cheap, but people just simply have no money to buy..and that is deflation.

    Because demand is poor, business owners will go bust. Even if they dont go bust, they are earning less. SO they will have to reduce the salary of their employees. And because deflation will leads to unemployment, workers will have no choice but to accept the lower pay.

    It will come to a stage where business owners, salaried workers, hawkers etc will be earning much less than the drop in prices. It means that people simply have no money to buy the cheap things .

    It is like having 20 RM pay now and the plate of rice is RM10. The plate of rice may go down to RM8 because of deflation, but your salary has been cut to Rm 10, so relatively, even the cheaper rice is now becoming more expensive relative to your total pay… This is deflation.

    Those with money savings in banks, do not rejoice. Banks will be affected by business failure, and banks will collapse, needing massive amount of money to recapitalise these banks… If government does not guarantee bank savings, people will panic and will have a run on the banks causing banks to collapse. But even if government guarantees the savings, and banks fail, government needs massive amount of money to rescue these banks and pay off the savings account holders.

    In the end, government itself may go bankkrupt and needs massive borrowing. This will result in finishing their foreign reserve, and without foriegn reserve, we are unable to buy things from abroad.There will come a stage that government cannot even afford to fill the potholes , collect your rubbish and even provides you with clean water. Government servants may not get paid, school buildings will be in a bad shape, the whole country going back to be like Myanmar now…. This is deflation.. That was how te Great depression started..

    In the end, everyone will be poor, government, businessmen, salaried workers, etc…

    This is how deflation spiral forms and feeds on itself. Even a great economy like Japan, with zero interest rate, took many years after 1990 to come out of deflation recently and yet, they are now again being pushed into recession again.

    I really worry about Malaysia… What is the use of having commodities when there is no demand for them?

    Only those who have no borrowings and high savings may not be affected.

    Like

  11. A true Malaysian
    Nov 25, 2008 @ 23:28:31

    Sidetrack a bit here. There are two open letters by one named Benjamin and a reply from Eddy in Lim Kit Siang’s blog.

    Very meaningful, all should read.

    Like

  12. A true Malaysian
    Nov 25, 2008 @ 23:40:25

    I personally think that ‘prudence’ is the best way of managing one’s economy.

    Very often we can see people who regard themselves as ‘poor’ who stay at squatter areas, having ‘Astro’ with high tech tv. But when come to education, they are the first one to say ‘no money’.

    Like

  13. romerz
    Nov 26, 2008 @ 01:10:16

    So long as the government feels that it has to feed an enlarged civil service (since they can’t find employment elsewhere), operating expenses will remain high in this country.

    Economics is not the major problem in this country but rather politics is, of the racial and kiasu type.

    There are 2 economies which exist in this country. Those protected with tax payers’ money and those who have to fend for their own.

    So far those who have to fend for their own are providing the tax dollars to ‘insulate’ the protected economy. When the tax payers are put to the sword, where do you think the protected economy will go?

    Short term gains for short sighted visions of grandeur by those who wield the power?

    Silly and short-sighted politics by those who think ‘facee’ is more important than putting food on the table!

    Cruel as it may be, in a way I welcome the global recession. This could be a good lesson for those in charge that ‘facee’ does not fill stomachs.

    We are all under threat, not just the Malays and Muslims. The sooner the ruling elite realizes this, the sooner we may have a chance to survive.

    Frankly, I couldn’t care less for Bumi this and that and I wish you all the best to succeed in attaining your goals but don’t hold us back from from keeping this country afloat.

    History and history involving Malay, Chinese, Indian, Dayak, etc., counts for very little when we are all hungry!!!

    Bloody stupid racist bastards, who would rather see turmoil in this country than acknowledge that the ‘ketuanan’ shit of 51 years is no longer relevant!

    (sorry doc. Got carried away and I would understand if you delete.)

    Like

  14. klm
    Nov 26, 2008 @ 06:07:12

    Take a look at recent announcement by Obama on his programs to handle the crisis. Malaysia could learn something.

    1. Spend to create jobs and make investment for future

    2, Cut back on programs not needed. Keep only what are absolutely needed, Make sure what needed are sensible and cost effective. Go through page by page and line by line of govt budget.

    3, Cut tax to put money in people’s pocket.

    Like

  15. Dr Hsu
    Nov 26, 2008 @ 10:33:23

    Romerz, I understad your frustration and I do not see anything wrong to warrant any deletion of your comment. Racist policies are what hold us back, that is the truth.

    As for Klm, what I propose above is very similar. Cut tax, cut interest rate, cut back on operating budget and spend spend on useful projects.

    By cutting operating expenses, we have to cut down on the size of civil service. Why not start at the very top, cut down the number of ministers and deputy ministers?

    UK with much bigger population has only 22 ministers. Why the need to have so many here is baffling. The main reason is of course to keep every leader of Component parties happy, and the top war lords of UMNO happy….

    We should have cut the civil service gradually a few years ago when the operating expenses are creeping up and the deficits have been persistent. Now, it may be too late to do anything. Any drastic cuts will lead to severe unemployment problems and its associated social problems.BUt still they must be some trimming of these to save some money to spend on worthwhile projects.

    The 100 billion lost to corruption as estimated by an overseas investment bank would have been handy in solving and jump starting many of the problems we are going to face..

    Like

  16. clearwater
    Nov 26, 2008 @ 11:34:06

    There is little we can do but to stumble along with a mismanaged economy and a corrupted system and try to make do until change comes. If it ever does in our lifetime. Voicing out alleviates the sense of frustration but cannot make much difference in the pace of reform if the present government is not changed. Reality dictates that we bear this government for another 4 years if need be while trying to effect a mindset change in our fellow citizens to adopt non-racial politics and cultural plurality. Next GE will be the watershed. If we are not ready by then, Malaysia’s fall to failed nation status is only all too evident.

    Like

  17. wassup
    Nov 26, 2008 @ 13:06:37

    Well.. it can be a spring board to a lot of people who is cash rich. Everything is cheaper now. Property, services, commodities etc.
    But NEP sometimes is making everything stuck at the first gear. Like if I want a new property but cannot buy the unsold lot because 30% is reserve for Bumi, how am I gonna play my part to move the economy, buy more cars?? Don’t think so…

    Like

  18. robertchai48
    Nov 26, 2008 @ 21:52:21

    Time to move on and work harder for our country economy. Boost our economy by spending what is necessary such as creating jobs, attracting more tourist money, infrastructure development, education, security in the city and etc. By spending this necessary it can create a “spill over” in various industries. Malaysia have all the criteria that can overcome this economic setback. As we know a revamp in our policies that emphasis a fair and just play

    Like

  19. irika
    Nov 30, 2008 @ 12:18:09

    If present govt cannot find the money (borrow, more tax, issue bonds), then will govt printing more money to finance deficit n expenditure?

    Like

  20. Trackback: Wisdom of a famous daughter « Dr Hsu’s Forum

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