According to JP Morgan and Morgan Stanley, China may raise the benchmark lending rate by as many as 3 times in the first half of 2011 as inflation is a major concern in China. Other emerging countries are expected to do the same shortly.
Ever since the phillips curve created by William Phillip in 1958, which shows an inverse relationship between Inflation rate and unemployment rate, very few nations choose the maintain price stability. They were more concern on the rise in unemployment rate.
Then in the 1970's, rational expectation and non-accelerating inflation rate of unemployment (NAIRU) arose that explain the long run relationship between inflation rate and unemployment rate. Unemployment rate will be at natural rate of unemployment in long run. Inflation rate on the other hand will fluctuate accoordingly.
Although the phillips curve is no longer used as it is too simplistic, the long run relationship between the inflation rate and unemployment rate is still correct according to NAIRU.
Since in the long run, we will have natural rate of unemployment, it is not hard for any economist to target inflation rate especially when we know that money neutrality concept holds (through countless number of researches).
It seems like China are among the first nation in the world that realize that and they start increasing their key interest rate as early as February of 2007. Although they did eventually lower the overnight rate to 5.31% on December of 2008, it is still among the highest interest rate in the world (lower than other well managed economies such as Brazil and India).
Since money supply is now considered as exogenous by some Economists, perhaps the best way of lowering money supply thus lowering inflation is increase interest rate.
US and other developed countries still maintaining a superbly low interest rate simple for the reason of boosting employment and GDP but look at the BRIC nations. They all have high interest rate and they all have powerful growth of GDP and GNP.
India are another well managed economy. The unemployment rate continue to decrease while the key rate is kept at such a high level.
We still have quantitative easing 2 (QE2) to come. It seems like developed countries are not going for interest rate hike anytime soon.
27.12.10
6.12.10
Do Business Students Need Macroeconomics?
Nowadays many business programmes (undergrad or postgrad) do not include any Economics paper. Some only offer Microeconomics (although they may call it principles of Eonomics or introduction to Eonomics). I had a conversation with a MBA graduate last week about this and according to her, business students do not need Macroeconomics. She said (quote)"business student only need to know Microeconomics such as demand, supply and elasticities. They do not need to know how to calculate GDP and unemployment rate"
This is my opinion as an Economics graduates to the question "Do business students need to learn Macroeconomics"
I think Business student need Macroeconomics more than they need marketing, logistic, human resource management etc. Macroeconomics is not a study of approaches to determine GDP or Unemployment rate. Macroeconomics is a study of the relationship of aggregate variables in Economics. Macroeconomics determine the effects and consequences of a change in an aggregate economics variable to another (or more) aggregate economics variable(s).
If unemployment rate increases, what will happen?
If money supply increases, what will happen?
If tax increases, what will happen?
Since business (firm sector) is a subset of Economy (other agents include consumer/ household, government and international sector), It can affect the economics and vice versa.
The best example of how Economy can affect business (firm sector) is during an economic crisis. Sub-prime crisis in 2007 started when Federal Reserve increased the money supply and decreased the interest rate after the Dot-Com bubble in 2001. Eventually it led to the overshooting of money supply and GDP and we all know the consequences after that.
During the crisis, the firm with best management team in the world either suffered decrease in profit, huge loss or even faced bankruptcy.
WHY?
I did a simple correlation of profit of firms in Malaysia, Singapore and Hong Kong. I used 3 economics variables: GDP, unemployment and money supply (M1) and 3 management variables: gearing ratio, company credit rating and quick ratio.
The result speaks for itself.
Correlation with profit:
GDP = 78.32%
Unemployment rate = 91.12%
Money supply = 92.85%
Gearing ratio = -18.5%
Credit rating = 38.75%
Quick ratio = 62.33%
In essence, Economics is a study of choices occurred results from unlimited wants and scarce supply. So Economics students study the management of resources and the flow of income.
For me, Economics graduates are similar to Business graduates. Only different is Economics students study the management of an (aggregate) economy while Business students study the management of a firm.
8.11.10
Bernanke VS Friedman
Ben Bernanke VS Milton Friedman.
Yesterday Helicopter Ben defended his action of more stimulus and easy monetary policy with another round of money supply increase. This time it is $ 600 Billion. The amount is relatively small compared to the first round of toxic assets purchased at $ 1.7 trillion.
BTW anyone still keep track of the increase in money supply by the Federal Reserve?
I sure can't follow their rapid fire of money created since the burst of subprime mortgage bubble in 2007.
According to Bernanke: The Federal Reserve is doing everything that Friedman would have them do". Furthermore, Bernanke said inflation is well under control at 1.2% yoy.
However the data is unaccurate and unusable for 2 reasons:
The inflation rate announced by Fed excludes food and energy costs, which are arguebly the largest portion of consumption by Household.
Secondly, and surprisingly, Helicopter Ben forget his economics. All economyst agree that prices are sticky in the short run as explained by Mundell-Fleming and Dornbursh. The prices is adjustable in medium and long run.
So of course the inflation rate is low now. As a Keynesian economyst, it's impossible that Bernanke doesn't know that.
So what will happen in the medium and long run when prices are adjustable?
1 word: hyperinflation.
With the amount of money supply Fed created and 0-0.25% interest rate + an unsustainable level of public debt, there are no way, not even US, can do anything to reverse the situation.
Maybe that's the reason Fed stopped announcing the M3 data: to avoid the exposure of actual money supply that will cause the inflation rate to skyrocket as a result of rational expectation, and will push the price of gold to the heaven.
Finally I understand why Friedman said "Inflation is Always and Everywhere a Monetary Phenomenon"
3.11.10
What's The Point, Obama?
One of the main issue that President Obama promised to change when he was selected to become the head of USA is Budget deficit and public debt.
As of October 10, 2010, the "Total Public Debt Outstanding" was approximately 94% of annual GDP ($13.616 Trillion) with the constituent parts of the debt ("Debt held by the Public") being approximately 66% of GDP ($9.01 Trillion) and "Intergovernmental Debt" standing at 34% of GDP .The United States has the 20th highest debt to GDP ratio of all nations, and has the fourth highest of the G8 Nations.
So what happen? Why budget deficit and public debt is still so high after almost 2 years in office. Where are the reduction in government spending? Where are the increase in tax?
Without the reduction of government spending and increment in tax, budget deficit will never go down.
Federal Reserve on the other hand is not doing Obama any favor. After so many trillions injected into the economy and unemployment rate still skyrocketing, our helicopter Ben still haven't understand economics and continue his usual habit of dropping money with his latest plans to inject at least another $500 billion into the economy through bond purchases under its unconventional program of quantitative easing.
What's the point Obama? Where is the "change"?
THE Big Crash Coming
Keynesian VS Classical school of economics have been the main arguement in economics study for decades or even centuries. Then it changed to Keynesian vs Monetarist or Chicago school and recently Austrian school jumped into this battle.
However the basic concept is the same: No government interference vs government interference. Many articles have been published by Nobel laureates.
It seems like everybody that knows about economy or economics favor one of them. Some argue the economy can't adjust itself and Government interference is necessary. Some argue government interference will only make matters worse and economics agents are rational to make neccesary adjustments.
Whichever school you are in (or you think appropriate), the very basic concept of accounting can be used to explain and possibly solve any economics crisis: Assets = Liabilities + Owners Equities.
The formula basically mean those with highest Assets and lowest liabilities are considered as richest.
Or is it??
In economics, we only use highest assets as the benchmark to determine wealth. In other words, countries or agents with highest assets (or production) regardless of the level of liabilities (or debt) are considered as wealthy countries.
With that in mind, it's amazingly easy to become rich and powerful country: borrow as much as you can and spend your way to prosperity. The more you spend and the more assets you own, the richer you are. In economics, if i borrow $10 from you, I am $10 richer and you are $10 poorer.
That's the reason why every government in the world encourage their agents to spend, spend and spend. It's the easy way to prosper.
For your information, this is the basic concept of Keynesian economics and sadly it is the dominant school of economics and almost all governments in the world are implementing it.
However, without understanding any economics, lets us use some logical thinking and comment sense for a moment: How can anyone become richer by borrowing and spending?
The answer is simple: you can't.
This is why we have some much big economics crisis since the Great Depression of 1929 (the start of Keynesian).
Anybody who watched "Wall Street" knew about the "Tulipmania". It was the only economics crash before Keynesian.
After Keynesian, Major economics crisis: crude oil crisis 1973, latin America debt crisis in early 1980's that led to a severe recession in the early 1980's, Economics crisis and Black Monday 1987, Russian economics crisis and Asia currency crisis in 1990's, Economics recession in early 1990's following the gulf war, Dot-Com bubble 2001 and recently subprime mortgage crisis 2007/2008. These are just the major and global economics crisis.
So what happened? Why Keynesian economics lead to so many problems in world economics?
The answer is again simple: Money and debt. All the crisis mentioned above caused by excessive money supply and debt.
Who control money supply and national debt?
GOVERNMENT.
The recent subprime crisis said it all. The whole recessions 2007 was the direct product of excessive money supply. Bank with so much money go to the subprime mortgage market and everything started from there.
Japan did the exact same thing as US in the late 1980's and try to spend their way to prosperity. They failed and yet to recover from the crisis known as "lost decade"
So can you see the pattern of major global economics crisis in the past 30 years:
1973, 1981, 1987, 1991, 1997, 2001, 2007.
What will be next?
I think it will be between 2012-2015 and the crisis will be more severe than 2007/2008. US and global governments did exactly the same thing each and every time: increase money supply and eventually it lead to a bigger and more severe crisis.
So the "crap" movie 2012 may be very bad, however the prediction may be correct after all.
However the basic concept is the same: No government interference vs government interference. Many articles have been published by Nobel laureates.
It seems like everybody that knows about economy or economics favor one of them. Some argue the economy can't adjust itself and Government interference is necessary. Some argue government interference will only make matters worse and economics agents are rational to make neccesary adjustments.
Whichever school you are in (or you think appropriate), the very basic concept of accounting can be used to explain and possibly solve any economics crisis: Assets = Liabilities + Owners Equities.
The formula basically mean those with highest Assets and lowest liabilities are considered as richest.
Or is it??
In economics, we only use highest assets as the benchmark to determine wealth. In other words, countries or agents with highest assets (or production) regardless of the level of liabilities (or debt) are considered as wealthy countries.
With that in mind, it's amazingly easy to become rich and powerful country: borrow as much as you can and spend your way to prosperity. The more you spend and the more assets you own, the richer you are. In economics, if i borrow $10 from you, I am $10 richer and you are $10 poorer.
That's the reason why every government in the world encourage their agents to spend, spend and spend. It's the easy way to prosper.
For your information, this is the basic concept of Keynesian economics and sadly it is the dominant school of economics and almost all governments in the world are implementing it.
However, without understanding any economics, lets us use some logical thinking and comment sense for a moment: How can anyone become richer by borrowing and spending?
The answer is simple: you can't.
This is why we have some much big economics crisis since the Great Depression of 1929 (the start of Keynesian).
Anybody who watched "Wall Street" knew about the "Tulipmania". It was the only economics crash before Keynesian.
After Keynesian, Major economics crisis: crude oil crisis 1973, latin America debt crisis in early 1980's that led to a severe recession in the early 1980's, Economics crisis and Black Monday 1987, Russian economics crisis and Asia currency crisis in 1990's, Economics recession in early 1990's following the gulf war, Dot-Com bubble 2001 and recently subprime mortgage crisis 2007/2008. These are just the major and global economics crisis.
So what happened? Why Keynesian economics lead to so many problems in world economics?
The answer is again simple: Money and debt. All the crisis mentioned above caused by excessive money supply and debt.
Who control money supply and national debt?
GOVERNMENT.
The recent subprime crisis said it all. The whole recessions 2007 was the direct product of excessive money supply. Bank with so much money go to the subprime mortgage market and everything started from there.
Japan did the exact same thing as US in the late 1980's and try to spend their way to prosperity. They failed and yet to recover from the crisis known as "lost decade"
So can you see the pattern of major global economics crisis in the past 30 years:
1973, 1981, 1987, 1991, 1997, 2001, 2007.
What will be next?
I think it will be between 2012-2015 and the crisis will be more severe than 2007/2008. US and global governments did exactly the same thing each and every time: increase money supply and eventually it lead to a bigger and more severe crisis.
So the "crap" movie 2012 may be very bad, however the prediction may be correct after all.
2.11.10
High Income vs Low Income
So according to the Prime Minister of Malaysia, Malaysia will be a high income nation in 2020. Everybody likes to have high income and more money!!!
However, what's the definition of high income?
According to world bank (in 2009), a high income economy is defined as a country with a per capita gross national income higher than $ 12,196 or more.
So if your wages is higher than $ 12,196 per annum, technically you are considered by world bank as high income person.
But are you???????????
Example: John and Gary are good friend. John stays at urban area and Gary stays at rural area. John earns $ 15,000 per annum and Gary only earns $ 5,000 per annum. Both of them are single.
John bought a house worth $ 100,000 last year (tenure = 25 years) with 4% mortgage rate and margin of finance is at 80%. The annual mortgage installment is $6,400. Gary rent a rural house at a rental fees of $ 2,000 per annum.
John also bought a car (tenure = 9 years) worth $ 50,000 with 4% interest rate and margin of finance is at 80%. That means John annual installment of $ 6044.44 while Gary still using his old motorcycle.
Standard of living in urban area is much higher than standard of living in rural area. Assume that Annual living cost for John is $ 4,000 while annual living cost for Gary is $ 2,000.
So who is considered as high income and who is considered low income?
World bank will defined John as high income group and Gary is defined as low to middle income group.
However John spend 16,444.44 per annum (with wages of $ 15,000) while Gary spend $ 4,000 per annum (with wages of $ 5,000).
Most of us will say John belongs to high income group with his since he is staying at urban area, drive a nice car and earns a handsome wages. For Gary who stays at rural area, rent his house and riding an old motorcycle, everybody will considered him as low income person.
However, is that true?
By ignoring the fluctuation in the prices of house and car (which offset each other), although John earns 3 times higher than Gary, Gary is the one with better money management. John overspent his income while Gary still have $ 1,000 unused income left.
There are 2 main problems for John:
1) Like most people who live at urban area, He used most of his income (around 83%) on hire purchase. Most people use around 40-50% of their income on hire purchase which is not healthy.
2) He buy something he can't afford. John bought his house and car on hire purchase which mean initially he can't afford both assets. There is a simple rule: if you can't afford it, don't buy it. I mentioned about debt many times so I don't think I need to repeat myself.
So make sure we distinguish clearly the borderline between high income and low income. High income means nothing without purchasing power and money management. It's not how much you earn. It's how much goods / services your wages can purchase.
However, what's the definition of high income?
According to world bank (in 2009), a high income economy is defined as a country with a per capita gross national income higher than $ 12,196 or more.
So if your wages is higher than $ 12,196 per annum, technically you are considered by world bank as high income person.
But are you???????????
Example: John and Gary are good friend. John stays at urban area and Gary stays at rural area. John earns $ 15,000 per annum and Gary only earns $ 5,000 per annum. Both of them are single.
John bought a house worth $ 100,000 last year (tenure = 25 years) with 4% mortgage rate and margin of finance is at 80%. The annual mortgage installment is $6,400. Gary rent a rural house at a rental fees of $ 2,000 per annum.
John also bought a car (tenure = 9 years) worth $ 50,000 with 4% interest rate and margin of finance is at 80%. That means John annual installment of $ 6044.44 while Gary still using his old motorcycle.
Standard of living in urban area is much higher than standard of living in rural area. Assume that Annual living cost for John is $ 4,000 while annual living cost for Gary is $ 2,000.
So who is considered as high income and who is considered low income?
World bank will defined John as high income group and Gary is defined as low to middle income group.
However John spend 16,444.44 per annum (with wages of $ 15,000) while Gary spend $ 4,000 per annum (with wages of $ 5,000).
Most of us will say John belongs to high income group with his since he is staying at urban area, drive a nice car and earns a handsome wages. For Gary who stays at rural area, rent his house and riding an old motorcycle, everybody will considered him as low income person.
However, is that true?
By ignoring the fluctuation in the prices of house and car (which offset each other), although John earns 3 times higher than Gary, Gary is the one with better money management. John overspent his income while Gary still have $ 1,000 unused income left.
There are 2 main problems for John:
1) Like most people who live at urban area, He used most of his income (around 83%) on hire purchase. Most people use around 40-50% of their income on hire purchase which is not healthy.
2) He buy something he can't afford. John bought his house and car on hire purchase which mean initially he can't afford both assets. There is a simple rule: if you can't afford it, don't buy it. I mentioned about debt many times so I don't think I need to repeat myself.
So make sure we distinguish clearly the borderline between high income and low income. High income means nothing without purchasing power and money management. It's not how much you earn. It's how much goods / services your wages can purchase.
5.10.10
An ignorant PhD
This is a true story. Read on your own risk!!!
I met an ignorant PhD candidate. Here's what happened:
A PhD in computer science candidate and myself got into a small monetary dispute. I don't claim that I am an expert in financial regulation but I am an economics graduates with certificate in financial market regulation and asset valuation.
He came yesterday with no knowledge in finance, economics or financial market regulation. However he claimed that according to his own "law", I need to pay him money or "else" (although in reality, with annuity, I am his creditor).
He doesn't understand the concept of annuity in money, doesn't understand the regulation in financial market, doesn't even understand the general concept of money and yet he still claimed that he is right. (he does not even understand the concept of present value, future value and compounding interest)
With both financial market regulation and asset valuation books on my hands was not enough to convince him that his argument is pointless. He even challenge me to sue him in court which is irrelevant since the money involved is very small in amount.
I have no discrimination on computer science. I think this is a wonderful field that is making our life easier. However this PhD is one in a million that have no respect to law and regulation. I must be very lucky to bump into such a "wonderful" person.
I met an ignorant PhD candidate. Here's what happened:
A PhD in computer science candidate and myself got into a small monetary dispute. I don't claim that I am an expert in financial regulation but I am an economics graduates with certificate in financial market regulation and asset valuation.
He came yesterday with no knowledge in finance, economics or financial market regulation. However he claimed that according to his own "law", I need to pay him money or "else" (although in reality, with annuity, I am his creditor).
He doesn't understand the concept of annuity in money, doesn't understand the regulation in financial market, doesn't even understand the general concept of money and yet he still claimed that he is right. (he does not even understand the concept of present value, future value and compounding interest)
With both financial market regulation and asset valuation books on my hands was not enough to convince him that his argument is pointless. He even challenge me to sue him in court which is irrelevant since the money involved is very small in amount.
I have no discrimination on computer science. I think this is a wonderful field that is making our life easier. However this PhD is one in a million that have no respect to law and regulation. I must be very lucky to bump into such a "wonderful" person.
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