Trumponomics 2017-2020

The election is going to have significant long-term consequences for US policies beyond its own borders. Expect the development of new policies in opposite end of the spectrum which should generally be less liberal than before to respond to Trump's core voters a.k.a middle class who were impacted by globalization. This piece is originally from The Edge November 7 2016 but is edited by me with my own thoughts. Let's think of two scenarios: Lite vs Full Trump. 

Plan
Lite: Reality sinks in and he must negotiate his measures with his fellow Republicans and forced to give up part of his original plan. Final proposals are more modest and neutral to the budget deficit. 
Full: He goes full steam ahead in the implementation of all if not nearly all of his campaign promises.

Impact on US economy
Lite: Slightly positive on US growth. No recession.
Full: US growth heading downwards. Expect a recession.

Impact on global economy
Lite: Global GDP growth to be approximately 3%. About 0.5% lower than initial estimates.
Full: Global GDP growth might be lower than 2% or minus if a recession occurs.

Impact on volatility of exchange rate/equities
Lite: Significant which we are feeling right now.
Full: Major. 

Impact on US monetary policy
Lite: No rate rise by fed in Dec 2016 as Dollar is too strong. Might have tightening in 2017 if reflation occurs due to his infrastructure spending plans.
Full: If US growth weakens or worse a recession, tightening will stop and QE4 would no doubt be considered.

Impact on US Treasury bonds
Lite: Increase in long term rates due to expectation of high deficits from his spending plans. Then a downturn.
Full: Same as above.

Impact on US equities
Lite: Selective sectors that benefits from his policies to go up as a knee jerk reaction. Others will go down particular technology sector.
Full: Defense, infrastructure and healthcare sectors to shine. Others no.
*Do not count on international strategies due to his closed door outlook but instead on purely domestic strategies and small-cap equities.

Impact on US dollar
Lite: Positive in short-medium term as investors flocks to long term bond yields that are more favorable.
Full: Negative if the US requires QE4 policy or if fiscal expansions plans are blocked by political gridlock.

Impact on gold
Lite: Purchase if the Dollar's strength means a weaker gold price. Buy if you hold USD physically. Not worth to convert Ringgit to USD as it merely offsets it.
Full: Purchase regardless if very certain of economic, geopolitical or financial stress.

Impact on emerging markets
Lite: Weakened at first by general uncertainty and by the rise of risk aversion.
Full: Weakened by increase in protectionist policies and risk aversion. Major trading nations to be impacted heavily such as China and Mexico.
*Russia might be the only exception since his "bromance" with Putin might result in the lift of US sanctions.

It's going to be a very interesting but at the same time nervous next four years for investors :) Trump is not going to be President just yet but he will on January 20th 2017. I would like to be wrong but until there is more certainty it is better to keep cash and wait for opportunities to present themselves. Signing off folks....

Oil Price Is Going Nowhere For A While

The original post is from the Economist :

http://www.economist.com/news/leaders/21647972-thuggish-government-playing-racial-politics-najib-razak-should-be-dressed-down-disconnect

From The Economist

Otherwise digest these points :

• Fall in oil price has not curbed fracking as expected in America.
• Fracking is getting "unconventional" oil out of shale, tar-coated sand.
• New techniques to drill oil (horizontal drilling and hydraulic fracturing).
• High production costs & heavy debts, more vulnerable to price shocks.
• But more flexible, can quickly respond to any price rise.
• Saudi refused to cut output to put American firms out of business.
• 6 months later, little sign of bust in America's shale basins.
• Saudi's plan failed, oil price to remain low.
• Fracking have lead to a boom in oil and gas production recently.
• American oil production is still growing, in March it rose by 120,000 barrels a day.
• Frackers able to cut costs (labor, steel and other inputs has fallen).
• Frackers also improved productivity and drilling efficiency - helped by technology.
• America is replacing Saudi as world's swing producer.
• America drilled lots of well and then plugging them, waiting for price to rise again.
• Potential of 300,000 to 800,000 barrel per day may be started up when needed.
• Unconventional oil gaining increasing share of capital investment.
• Oil price picture - unlikely to rise sharply.
• America will stop importing energy between 2020 and 2030.
• Message from America - finance and technology more than a match for Saudi.
• OPEC says America's oil boom will be over by year-end. Wishful thinking.
• Shale revolution is marching on.

My thoughts : US is no longer dependent on Arab oil anymore. This is clear as we are witnessing a partial withdrawal of the US from the Middle East, hence the chaos. 

Meanwhile in Saudi, they have shown reluctant to cut output in order to maintain market share. In the long run this strategy will probably backfire. Why?

Currently the supply glut is supported by restocking activities (oil being stored in hopes that demand and prices will pick up later). [1] Demand will sap because China is growing at its slowest in 20 years. [2] Prices will likely tumble because storage facilities in Europe and Asia are already 80-85% full. Much more and they will overflow.  

Oil and gas income is still the backbone for the Malaysian economy. It accounts for 30% of government's total revenue. Again we are the spectators, too small to make a difference. Don't expect our budget to be people centrist for the next few years. We need to be prepared for a prolong spell of cheap oil.

Our weakening MYR (due to capital outflows) will more than offset any gains we get from cheaper oil. So yea, I'm not that happy either, I've said that before:

http://aboiwealthpot.blogspot.com/2015/01/ron95-ron97-cheaper-by-35c-why-you.html

GST pre-digestion

Overall
Concluded that GST will have a MAJOR impact on our core inflation figure (will be higher) and prices will NOT go down contrary to state media. There is no such thing as deflation in a country when the interest rate is not even near zero. Take Japan and Europe as an example of deflation.

**My thoughts on the impact is highlighted in Red
**Please let me know if you think I missed something important out?
Other good reading: http://www.theantdaily.com/Main/GST-Does-the-gov-t-really-understand-what-essential-goods-are

1. Fuel
Ron 95, diesel and LPG (natural gas) will be exempted from GST. Only Ron 97 will be subjected to the new 6% GST.
-None, because if you can afford Ron 97 you probably are rich enough that the 6% is negligible otherwise the impact is none to usual consumers, even trucks are spared because they use diesel.

2. Utilities
Water is exempted. A household will only have 6% GST charged to the electricity bill for usage above 300 units. This means the first RM77 has not GST. Any amount after that is subjected to 6%.
-Moderate, this is a monthly expense. Assuming a RM250/month bill, you are looking at RM10 tax per month and about RM120-RM150 tax a year.

From Tenaga's webpage

3. Insurance
All insurance policies except for life insurance will be charged 6% GST. GST would also impact all traditional and investment-linked policies which had medical, critical illness or personal accident benefits attached. For traditional policies, the GST is imposed on the premium, while for investment-linked policies, it is charged on the insurance charges. For investment-linked policies, insurance charges will escalate with age because of higher insurance charges.
-Major, this is one of the worse because it impacts everyone regardless of age and gets increasingly more taxing as you age due to insurance charges. It is very difficult to estimate the cost because it varies according to age and what you have insured. I am looking at a RM500 impact on my yearly expense for having a traditional policy, two investment-linked policies and PA at age 29.

4. Credit Card
RM50 government tax is now abolished. However 6% GST is applied on the card's annual fee. It is said that this separate charge will clearly be reflected in your credit card statement.
-Minimal as it is once per year, cost can be reduced if you have fewer cards and if you manage to hold the bank hostage by asking the bank to waive the fee. RM24/year impact assuming you have two cards with RM200 annual fee each.

5. Books and e-books.
6% GST applies to all publications except the following: dictionaries, encyclopedias, newspapers, texts, references, works and religious books. And yes GST will be imposed on magazines.
-Minimal but actually it depends on what you buy, assuming half of the tax rebate of RM1000 goes to magazine you are looking at a RM30 cost per year. 

6. Housing
Basic construction materials are taxed: cement, bricks and sand. These make up 44% of construction cost and since GST will be charged cost will go up. Residential property including SoHo (small office/home office) will be exempted but not commercial properties.
-Minimal, some would argue with me that's ok we can debate over bf/lunch/dinner. Property companies expect GST to result in a maximum of 2.6% increase in house prices. However with the housing boom and asset peak already over, it is more likely than not likely that house prices will remain stagnant except for really prime locations. Why would BNM not use interest rate to defend the MYR? Because it knows that such a repeat would make us go back to 1999 crisis where house prices collapsed.

7. Automobiles
First, new vehicles will incur GST on the FINAL selling price of car (see pic). Please note that this includes margins, handling/inspection fees and accessories therefore the tax will be on a much HIGHER base than before. Second, used vehicles are not subjected to the current sales service tax but is also NOT under a GST zero rated item either therefore I suspect used cars are going to get big shock later once GST is implemented. Third running costs like motor insurance and servicing are subjected to GST. Only Ron95 petrol and diesel are off and so is license renewal and road tax but these are not high cost to begin with.
-Major, as mentioned almost every aspect of owning a vehicle is GST-able. Like insurance this is difficult to estimate and is based on the car that you own. You are probably looking at the thousands for a new car/used car and several hundreds for yearly running cost.

From Paultan.org, Malaysia's #1 source for auto news 

8. Banking
The RM1 MEPS fee charged when we withdraw from another bank’s ATM will increase to RM1.06. No GST will be charged if you make a withdrawal from your own bank’s ATM. Similarly, other services offered by the bank, such as money transfers (e.g. cashier’s order and demand draft), telegraphic transfers, money exchange, loan, cheque, credit card, and debit card will see 6% GST charged to its service, commission or subscription fee.
-Minimal, unless you do very very frequent transactions. Please note that this is GST on the FEE not the amount of the transfer/loan/credit/debit and etc.

9. Other Services
6% GST will be imposed on tuition fees, as tuition centres are not categorised under educational institutions. The price of beauty services like manicure, and hair and facial treatments will be subjected to 6% GST too. Massage services are also chargeable with the GST if the annual turnover for such businesses is RM500,000 and above. Aside from beauty services, cosmetics and other products for skin, hair and body care will also be charged GST. Beauty products sold at airports as duty-free items will NOT be subjected to GST.
-Major, the tuition fee is a big ouch as it is a monthly expense. For RM400/month, you are looking at almost RM300 tax a year. Beauty services and products will hurt ladies a lot. Depending on your monthly cost but it's going to probably be a few hundreds tax impact per year.

10. Restaurant
If you look at restaurant bills, you are already paying 6% government tax and 10% service charge. GST will replace the government tax and since both are taxed at 6% there is no difference. However because of the new tax regime, the GST is applicable on the service charge (service charge is collected by restaurants for services rendered and is traditionally set at 10%). Assuming a bill of RM100, currently you will pay RM6 govt tax and RM10 service charge for a total of RM116. With GST you will pay RM10 service charge and RM6.60 govt tax (110*6%).
-Minimal as this is a daily expense. If you frequent restaurants in shopping malls and spend roughly RM500, you are looking at an additional RM3 per month.

Saturday Lite: Econs in 30 Minutes

Emerging Markets Continue To 'Lao Sai'

"Lao Sai" Hokkien dialect meaning 'dribble shit'. It means a case of diarrhoea. 

As of February the 4th 2014

http://www.thestar.com.my/Business/Business-News/2014/02/07/Emerging-market-equity-fund-outflows-this-year-surpass-whole-of-2013/

As the Federal Reserve makes steps to normalize monetary policy, currency experts 'BUKAN saya' only expect things to get worse for these markets as the U.S. dollar is forecasted to get stronger. However I have talked about this several times albeit primarily w.r.t (with respect to) the Ringgit. [1] Aboi's Updates For February 2014 (Welcoming the Horse) [2] MYR, The Gohmen, Interest Rates, Property - The Linkages and also in my Facebook page @ Aboi's Blog. How long more can BNM defend the ringgit without having to increase interest rates?

Best Countries for Vacation on a Shoestring

The focus here is on purchasing power parity (PPP) which is an economic technique used to determine the relative value of currencies against each other. In other words, PPP can be used to as an international comparison of income level. In order for one to use a common basket of good used by all countries in comparison for purchasing power. The measurement being most popular now are either the Big Mac Index or Starbucks tall Latte Index with the former being the most widely used. 

Why is this important? First, export driven countries have severely undervalued currencies. Second, rich and industrialized have just the opposite. The reason is simple, a weaker currency makes your exports cheaper and therefore promotes industries to make them but is bad for us the consumers because things are expensive especially those being imported. Ironically a balance has to be obtained. You can't keep undervaluing your currency as any imported inputs to make the exports becomes more expensive. Look at the Tiger Cub members whom are all export oriented economies; Malaysia (-44%), Indonesia (-45%), Philippines (-28%) and Thailand (-47%). 

If you live in Malaysia, best countries to visit when you have a tight budget are countries that do primarily exports but do not earn as much as we do (GDP per capita). Here's a rough spreadsheet and the numbers (source: CIA handbook). I excluded NA and Europe as they are rich industrialized. I excluded South America and Africa too as the high cost of flying there compensates for their weak currencies against us.

Countries that are developed (primarily services oriented more than >65%) certainly always have a strong currency. A strong currency also translates to better income levels. It is the basis of their economy just like we the exporters need weaker currency, they need a stronger currency in order for their economy to function. We as a nation needing exports to drive our economy will always be the underdog, that is unless we are able to move forward from manufacturing into services. The logic is pretty simple. Remember when Singapore first left The Federation of Malaya, their currency was at a 1:1 basis (during their manufacturing phase) and it slowly creep up to what is now at a ratio of ~2.5 and it's going to be higher. China's currency is not going to fly high anytime now. In fact they have a long way to go before catching up to any of the Asian Tigers, I reckon it's going to be 20 years or so, are you going to hold the Renminbi for 20 years? Go and visit Singapore next year while China can wait for another decade.

If you life's dream is to travel and see the many wonders of the world, I do hope that your plan does include either working in Singapore or Australia =) if not, well we have Google Earth.

Jenna Ho Pui Yu. 23 year old lass from Hong Kong.

Why We Didn't Join The Tiger Club?

We often ask ourselves and the country we live in, what kind of government do we need? What policies should it pursue? What should the government meddle with and what it should not intervene? 

The four Asian tigers (Hong Kong, Singapore, South Korea and Taiwan) placed major emphasis in education and industrial policies that drives large exports to rich industrialized countries and are now highly developed economies in East Asia. Their economic success stories have served as role models for many developing countries, especially the Tiger Cub Economies (Malaysia, Indonesia, Thailand and The Philippines). In order for industrial policies to work good governance is mandatory. Governments in making decisions with regard to electoral or personal incentives can be captured by vested interests, leading to industrial policy that would only support rent-seeking the political elite, while distorting the efficient allocation of resources by market forces at the same time. This is thus by far the largest criticism against industrial policy, the failure of government.

Here then lies the basis of good governance and is the foundation of all developed economies in the world.   
1. Providing a set of uniform rules and regulations. Only a good government is able to make markets possible. Failure to adhere to the strictly defined rule of law creates nepotism which are common in developing countries (hence the word developing which includes developing new rules/regulations to make markets possible). Lack of binding contractual and transparent agreements you will see business deals being made behind closed doors guaranteed only through personal relationships.

2. Defining and protecting property, institutional and individual rights and laws. This makes market more credible. The best example there is is what we call the copyright law, without such a thing there is no point in writing to earn a living nor there is any meaning in creating new music, same goes to movies. Without copyright protection, there's no incentives for individuals to develop them and hence no market to begin with. Property law which defines the rights of the buyer and sellers facilitates investments too and is in itself another form of market transaction that benefits the economy as a whole.

3. Root out fraud & corruption. Let's take fraud. A good government ensures that the infrastructure is in place so that any money being deposited into say a bank or an investment scheme doesn't just pocket our money and disappear. Or when we buy new shares from the stock market we have a reasonable degree of certainty that the company would not engage in any fraudulent activity. Hong Kong was notorious for it's street gang and heavy corruption within the authorities, keep that in check and see what we have now. 

4. Builds and maintains infrastructure. A modern functioning economy are transportation intensive. We need bridges, roads, highways, ports, reliable electricity, good broadband connectivity, installing traffic lights and other utilities. We often do not realize that having them makes private businesses less costly as a result. By replacing trucks on highway with an efficient railway system you not only reduce the transportation time of goods but we also reduce the cost itself. This is evident via massive infrastructure spending by countries like China.

5. In other lesser ways, trade relations and international trade agreements can only be made via government. In Malaysia we take great effort in lowering trade barriers with countries like China and the United States as this will reduce the cost of trading with our major partners. 

No doubt that Malaysia has to pursue industrial policies to grow its economic pie as we are export driven but Malaysia's government is big and a big government is what I describe as highly inefficient. Communism did not fly because the government is so centralized that it has to control everything from the flow of goods, the quantity being sold and as well as the price. Such a government is one very very large monopoly. "What would your business look like if your customers, by law or system, could not go anywhere else?" [quoted from the book Naked Economics]. When there is monopoly, innovation and responsiveness is bone dry. Is there a need to go the extra for a customer? Is there a need to provide better service at the expense of profit? The answer is NO, because there is no market share to gain, you have it all yourself. 

Crony capitalism (apparently quite prevalent in developing countries) is a little bit like communism because when the government controls some element of the economy, the allocated resources go wherever politicians sends them rather than by the market. Projects that have the potential to be highly profitable do not get financing while undisclosed projects are given to brother-in-laws or well known contacts usually for personal gains. First we lose our tax money, second markets ONLY work at the peak of its potential when resources are flown to where they are valued most. This is done automatically if there is no intervention.

The rule of thumb to follow is that the government should not be the sole provider of particular service or distribution of certain goods unless there is a very good or a compelling reason to believe that the private sector or the state will fail. They are still however elements of a country that cannot be run by the private sector and states, for example public healthcare and national defense. No company can tell where you should place your submarines plus it's a secret, in areas like this it is best left to the government. In order to fix problems, the first step is always to realize that there are problems in Malaysia. One of them and the easiest is to get the government's sticky fingers out: introduce competition, eliminate cronyism, return to fiscal federalism and decentralization, give states more power & development grants, provide directed subsidies only. I am pretty convinced that the failure of the economy would be the ultimate call for a new government in our country. Communism failed in 1989, when will our central command be bygones? It is not that we are not moving forward, it's that we are not moving quickly enough.

Malaysia 2020 Is Not A Vision, It's A Dream

The study of economics also encompasses poverty, income inequality and wealth distribution which is directly tied to two major things: human capital and a nation's productivity level. How does one define human capital? I tie it with scarcity. Here's a simple picture to begin with. How much skill does it need to man our national favourite "Old Town" like kopitiams? that you see ubiquitously (not scarce/rare) in most major cities in Malaysia. At most RM5/hour. Compare this with engineers RM30+/hour, doctors and lawyers RM50+/hour. Professionals are scarce, standing there manning the shops are not, any human who has two legs can do the job. Hence poverty is directly linked to absence of human capital. Take India for instance, it is not a poor country, it has a booming middle class but it's poverty rate is still high. According to 2010 data from the United Nations Development Programme, an estimated 37.2% of Indians live below the country's national poverty line. The problem lies in education or a lack of developing basic skills. You see India's illiteracy rate as detailed by the board of census from India is at a staggering 24.4%!! For that education matters, it matters a lot. 

Construction a big contributor. Services which comprise 50% of our GDP should be in the driving seat!

An economy of a country booms by growing its GDP. A bulk of our GDP growth in 2012 is from GTP via the construction industry, in fact at 5.6% is the highest contributing sector surpassing services at 4.9% [source: as above]. A healthy economy does not necessarily mean a base of growing human capital, we have to look deeper. You cannot turn "penjaga kerata or Ramli burger flippers" into professionals even when the economy is healthy, only investments into human capital can do that. Name me one developed country/high income nation that does not have a big pool of human capital? Neither does having plenty of natural resources mean nation can be high income. Take a big look at most countries in Africa, they are rich in resources but are not rich themselves. In reality, there's a striking correlation between a country's level of human capital and it's economic well-being; e.g. Japan, Switzerland, Hong Kong (which used to be apart from China) and Singapore just to name a few. Malaysia's labor market can't do that much for graduates with lack of skills or dry of basic knowledge. There is no way you can force private enterprises to hire anyone and here lies our humongous civil service. The global economy as of 15 years ago favours skilled workers highly as the shift to using computers infiltrates almost every sector of the economy and we need people who are intelligent to have those skills and to learn new skills at the time on the job.

As you can clearly see, we depend a lot on construction. E.g. Big projects like the MRT and River of Life in KL. 

Growing too slowly to hit Vision 2020. Why are less productive "developing countries" growing at a faster rate than us? Note that the top are all "developed countries".

Levels of productivity are inextricably linked to how much human capital there is. Take this: Why would MNC (multinational corporations) like Samsung continuously build factories in Malaysia when it can be a lot cheaper say in an emerging market such as Vietnam? The answer is productivity. Most of Malaysians can compete against a Vietnamese peasant who earns say 1/4 of our salary because we are better educated, better trained and have better supporting infrastructure. The term "outsourcing" only has context when a company deems that it is cheaper to produce of X or half of X with say 1/20 or 1/20 relative to our salary. This is a clear example of sport shoes where it is now exclusively being produced in countries like Thailand, Indonesia and Vietnam. A nation's productivity levels depends on many factors ranging from development expenditure (infrastructure, education), better government institutions (regulatory, anti-fraud, tax structures) and innovation. Unknown to many, productivity also affects birth rates because as your RM/hour earnings go up, your time becomes more expensive so we indirectly spend less time raising children. These people now invest in the qualify of their children and not quantity. Singapore is a good example with birth rates now at near 1 levels, well below the replacement rate of 2.1 [source: star publications] hence they depend a lot on attracting highly skilled workers from abroad such as Malaysia! This explains a lot of things: high income nations have slow population growth rate if not negative like Japan, Chinese in Malaysia have the lowest birth rate among the 3 major races, Africa has many malnourished kids.

The problem I see with Malaysia:
1. We attract "mainly" low skilled workers; construction laborers.
2. We have an exodus of highly skilled workers and is growing by leaps and bounds; migration problem.
3. Our only saving grace today is that we are "cost-competitive" (not increasingly productive), using more or less of the same headcount with the slowly rising wages to produce X for the next couple of years.
4. Money from our national budget goes to the wrong place; operating expenditure 70% and development expenditure only 30% as of 2011.
5. Education sadly is not given a national agenda. Syllabus gets change whenever we change our education minister.
6. I personally do not trust the 3% unemployment number which has been at the same level for a decade. *I have no data to back my distrust except for rising crime.

The world now demands for ever higher levels of human capital which translates to better wages and higher levels of productivity. This is the only thing that separates high income nations and the have nots. We need a country that gets this right and schools/colleges/universities that produces the right stuff. Having said so, we have nothing on the right lane. We should forget about Vision 2020. Take education and you need a generation to fix it and the fruits of that seed can be seen in countries like South Korea and Taiwan which started back in the 1980s.

On a side note, this topic also explains another recent wave of events. [source: a book titled "handbook of crime correlates"]
Higher total socioeconomic status (usually measured using the three variables income (or wealth), occupational level, and years of education) correlate with less crime. Longer education is associated with less crime. Higher income/wealth have a somewhat inconsistent correlation with less crime with the exception of self-report illegal drug use for which there is no relation. 

Higher parental socioeconomic status probably have an inverse relationship with crime.
High frequency of changing jobs and high frequency of unemployment for a person correlate with criminality.
Somewhat inconsistent evidence indicates that there is a relationship between low income, percentage under the poverty line, few years of education, and high income inequality in an area and more crime in the area.
The relationship between the state of the economy and crime rates is inconsistent among the studies. The same for differences in unemployment between different regions and crime rates. There is a slight tendency in the majority of the studies for higher unemployment rate to be positively associated with crime rates.

Dangerous Times We Live In

Zhang Li 张俪 (born 8 Jun 1984) is a model and actress from Guilin 桂林, China.

Markets have been wobbly in recent weeks no thanks to the Eurozone debt crisis by the PIGS. Read this interesting article: http://malaysiafinance.blogspot.com/2011/11/what-if-greece-defaults.html. And you have President Obama who was at the G20 summit (obviously) giving some notion that US banks who have a tiny portion of stake in some of these debt laden European countries would require some form of bailout help. Again we see America digging a bigger and bigger hole, how is that possible? Why can America (and not any other country) afford itself to keep printing money from spandex or electronically and will it ever lose its currency's value?

This is where the Feds come into picture. The most important regulators are those taking care of the financial system as they are the ones who will determine how freely (liquidity) and safely (disposition) the credit flows. The U.S. banking system is ridiculously complicated and the top dog of regulators is The Federal Reserve regulating the bank holding companies like Citigroup and state-chartered banks. The Fed's actions are independent and therefore the Chairman can easily be considered the *second most powerful man* in America!!

The Fed's creation can be traced back a long time ago during the Panic of 1907 and was finally passed as an act in 1913. What the act said was that it gave the Fed permission to create an "elastic" currency, one that essentially means the ability to expand (print) or shrink (take out from circulation) the money supply as needed. Hence their two powerful roles: Lender of Last Resort and Dictating Monetary Policy. The Feds power was clearly demonstrated when the financial crisis and recession of 2007-2009 came about; printing money to lend to all (which is for bailouts), slash interest rates and buy up tonnes of bonds.

Malaysia's Central Bank (BNM) is similar to the Fed but with *one key* difference that we are not able to print the Ringgit at will (please do not believe our pig headed dumb ass ruling party politicians) because we are not a global currency. The ringgit has little value outside our national borders as no other country uses that for their reserve currency. The U.S on the other hand, has the Fed to issue the U.S Treasury securities and conducts Treasury security auctions and there are always buyers. And who buys them? Other countries...China holds ~28% of U.S debts followed by Japan at ~20%. U.S debt is projected to be at 100% of the GDP (the total size of their economy) by end of 2011 which is ~15 trillion dollars. All I can say is that debt to GDP ratios are irrelevant (I'll talk more in another posting). E.g. Greece had 130% and collapsed. Japan is at 200% and is in safe fiscal position.

Back to the issue. Why does the USD still hold the demand. 1. It has value 2. Intl accepted payment for G&S 3. Huge liquidity in the world financial market and 4. Been in the radar and is engraved in the world's trading infrastructure. Our Ringgit fulfills not of that and is why we can't simply print money, it will devalue it tremendously and quickly. This is also the sole reason why the U.S is a consumer driven economic country. Foods and goods are cheap because they are priced in the US dollars. Consider this:


Gas prices in the US is cheaper compared to any other country because they do not suffer from converting their own currency to the dollar (only true for countries that are weaker compared to the USD). In Europe most countries pay anything between $7 to $10 per gallon (mostly due to heavy tax). In Msia we pay about $3 per gallon but that is after subsidies. This is true for all imports which are paid in dollars and only true for the United States. And for all goods that are made using oil and gas which it mostly is, everything will be cheaper in the States. Other countries have to first change their currency into dollars to settle their balance of payments on imports and exports. This is the main advantage of being a reserve currency for the world and sadly America is abusing that state by printing more money every year and then.


Yes, of course the $$ can lose its value one day but what's the cue?? Two possibilities I can think of, one that the market decides not to use USD to price commodities. E.g. imagine when the oil players OPEC decide to use something like Yen instead. Second, that the US one day might be totally unable to repay its interest of its debt/default. You saw this year's US credit rating downgrade from AAA as the politicians bicker amongst each other. The consequences from this would be catastrophic: hyperinflation, big loss of USD value, shocking rise of interest rates, unemployment; practically an end of a nation just like Greece. The best indicator IMO is to look at the *Foreign Currency Reserves* which shows the USD declining slowly but gradually.

As of Q2 2011 (most recent report), there was a record $3.28 trillion in foreign government reserves held in dollars. This represents 60% of total measurable reserves, down from Q3 2008, when dollars comprised 67% of reserves. Since the percentage of dollars is slowly declining, this means that foreign governments are slowly moving their currency reserves out of dollars. In fact, the value of euros held in reserves increased from $393 billion to $1.45 trillion during this same time period. 

Source: IMF


Because I am following the 2012 Primary Debate in the US, one particular Republican candidate by the name Ron Paul intrigues me. 

His stance that US has been overspending and he wants to end the Fed. As mentioned the Fed answers to no one, they don't face audits, nobody can question their actions, they are not accountable to the US Congress as well. Why is the Fed so dangerous? Money in the US now comes into existence via debt which is then used to create more debt. The Feds make funds (from thin air) available to the US government to overspend, instead revenue should be gotten from direct taxation. Whether he is right or wrong is itself another posting and is also a difficult question to answer. It's more or less an Austrian economics vs Keynesian economics. Folks and experts have been debating on this for decades. I'm an Austrian believer and I believe free market pricing is better than interventionism (which is exactly what the Fed is doing; distorting the market value).


What's to look at in the near future? Italy and Spain is on the verge of unable to service their debts. Because Germany and France (the biggest economies in the EU) won't have enough money to bail both of them out in addition to save Greece, only the US can step in to help. US banks have stakes in these countries though only a small fraction of it. The US can be tempted to save them because if Europe goes into recession US economy will falter just as they begin recovery. If they decide to help guess who needs to print more money: *the FEDS*. Dangerous times we live in which is why I wrote this post in the first place :) Next I will post on the AirAsia/MAS debacle.