Regular Economic

It is quite disheartening to notice ever since 2008/09 world recession flared up, I find examples of high profile figures and leading lights making macroeconomic statements without really understanding macroeconomics. 

Given that these statements have policy implications that impact on real people making such erroneous statements – no matter how well-intentioned one is – is a dangerous thing that we should avoid. Imagine if I suddenly started to make claims about the strength of bridges such that they would fall down if my advice was taken. There would be a law against that. 

One notable economist apparently thinks that macroeconomics is not “regular economics” – but rather some far-fetched misplaced set of ideas that would be better forgotten. My view is different. A correctly specified macroeconomics provides a safeguard against falling into logical traps – such as the fallacy of composition. 

The so-called “regular economics” is a fantasy world where the angels on the pinheads are assumed away into one representative angel who knows all and never makes a mistake (on average). If you want to understand how mass unemployment arises and how it is solved then the mainstream version of “regular economics” will leave you in the dark.

Income Creator of the Last Resort

Before Brunei become what she is now, a great majority of our people still lived off the land. Nobody really died of hunger if he didn't have a regular paying job. Just plant a tapioca in your backyard, and eat it. Now it's not the case anymore. 

Nobody has land large enough to cultivate the basic food he needs to feed his family, so he needs a job to earn the money to buy it. There are no more cases of homestead, everybody has to buy his abode, or otherwise rent it. To be able to do so, he needs to earn income.

There's no way for us to get back to the idyllic past of early 1900's, when losing income merely means people go back to bartering what they make, eating what they sow, and living on what they build. Now you have to buy everything!

Today, you need someone all powerful to provide everyone with the job and income to live a basic life - either an all powerful feudal lord, one who has monopoly control of all major factors of production, such that he has no fear of people withdrawing money/income from the system….

…..or a government that knows how to strike the right balance between creating income for the people via spending, and ensuring that the money has value enough to purchase an adequate supply of goods.

Anyway, SELAMAT HARI RAYA AIDILFITRI - MAAF ZAHIR DAN BATIN.

Haze Oh Haze

Thick haze lowers visibility and air quality in the country. Smoky air obscures the view of an apartment complex inBrunei-Muara District. Picture: BT/Yusri Adanan

Since the Asia financial crisis back in 1997/98, haze had been a regional phenomena for South East Asia. Every year we suffer the same choking smoke produced by our neighbors. The saddest part is that with all the meetings and pledges to stop haze, it still comes to haunt us with greater vengeance year after year.

The irony is that ASEAN countries are monetarily sovereign and yet we are still willing to torch our assets (resources) in order to accumulate other people fiat currencies. We place more faith on others people's money than ours. This is because we are so obsessed with the notion that we need to export our way to prosperity.

Don't we realize that we are plundering our resources just to accumulate trade surplus. Those currencies that we cherish so much are nothing more than bits in a computer or numbers in someone's ledger book. And the worst part, those bits or numbers are not being backed up with any tangible commodity such as gold or Mount Fuji or Great Wall of China! This is the same goes with Brunei dollar, Malaysian Ringgit, Indonesia Rupiah, Thailand Bath, Vietnam Dong, Philippines Peso and etc. Totally zero backing what so ever!!!!....

All those currencies that are floating all over the world is FIAT currency. A currency that is not being backed with anything since 1971 except for the issuing country's faith. And because we believe more on other people faith we are willing to sacrifice our health.

Unless people came to their senses soon, the haze phenomena shall be with us for many years to come. It is really sad, indeed. 

Fallacy of Composition - Fiscal Austerity

One of the most important concepts that are being teach in economics, and most importantly in macroeconomics, is the notion of the fallacy of composition. 

Students and others who haven’t been exposed to macroeconomics naturally extrapolate from their own individual situation to society and the economy as a whole.

This often leads to the problem of the fallacy of composition. Of course, that isn’t just restricted to economics. While a few people could exit the doors of a crowded movie theater, all of us could not.

The macroeconomics example of the fallacy of composition most often used is the paradox of thrift. Any individual can increase his saving by reducing his spending — on consumption goods. So long as his decision does not affect his income — and there is no reason to assume that it would — he ends up with less consumption and more saving.

The example I always use involves Kassim who usually eats an ayamku spring at Ayamku restaurant every day. He decides to forego one ayamku spring per week, to accumulate savings. Of course, so long as he sticks to his plan, he will add to his savings (and financial wealth) every week.

The question is this: what if everyone did the same thing as Kassim — would the reduction of the consumption of ayamku spring raise aggregate (national) saving (and financial wealth)?

The answer is that it will not. Why not? Because Ayamku will not sell as many ayamku spring, it will begin to lay-off workers and reduce its orders for chicken, cucumber, cabbage, rice, and so on.

All those workers who lose their jobs will have lower incomes, and will have to reduce their own saving. You can use the notion of the multiplier to show that this process comes to a stop when the lower saving by all those who lost their jobs equals the higher saving of all those who cut their ayamku spring consumption. At the aggregate level, there is no accumulation of savings (financial wealth).

Of course that is a simple and even silly example. But the underlying explanation is that when we look at the individual’s increase of saving, we can safely ignore any macro effects because they are so small that they have only an infinitely small impact on the economy as a whole.

But if everyone tries to increase saving, we cannot ignore the effects of lower spending on the economy as a whole. That is the point that has to be driven home especially when countries all over the world are on fiscal austerity mode including our country, Brunei Darussalam.

Wind Power - CSPS Study

Yesterday Brunei Times carried an article about a study on wind power in Brunei Darussalam. The study was conducted by a Canadian consultancy firm called Powertech Labs Inc. This study was commissioned by Center for Strategic and Policy Studies (CSPS).

According to the article, Powertech Labs Inc had identified 19 potential sites for the development of wind energy, both onshore and offshore, in Brunei Darussalam. Those sites had a potential to produce from 20 to 1,800 Megawatts (MW) of electricity, which is greater than 100%  of Brunei's annual generation.

However, according to Powertech Labs Inc, offshore sites are expensive to develop compare to onshore. For offshore it is estimated to cost at B$320 per MW to develop whilst onshore it is estimated to cost at B$120 to B$160 MW.

So what's next? If people have the mentality that government finances are the same as household finances, I am willing to bet my bottom dollar that this study (report) shall be gathering dust somewhere in CSPS library. Why? Because it is being perceived as too expensive and our government can not afford it!

But if people realized that government finances are not the same as household finances, then our country should take up this study and start implementing the ideas. We should be drawing up the budget to procure this technology. As a monetarily sovereign nation, Brunei can afford to develop this technology further. Brunei has the ability and authority to credit any vendor's account whom that can supply, construct and commissioned all the wind turbines either onshore or offshore. 

We must realized that Brunei spending is not constrained by how much oil and gas that she can pumps out from the ground and sell. Even Brunei to runs out of oil and gas or all her overseas investments failed, it does not hinder the government ability to spend by a single cent. Brunei can create as much or as little as Brunei dollar she wants.

How does Brunei have the ability to create Brunei dollar? Well, it all started when the world went off the last remaining gold standard in 1971. Since then all world currencies are created without the backing of gold or any other commodities. The same goes for Brunei dollar. It is created without any backing either gold or oil and gas. The only thing that back up today's currency is government faith.

Since we can not runs out of government faith, Brunei can create any amount of money she wants in order to pay any amount of bills that are being presented to her. Thus, Brunei can afford to procure all the wind turbines that are required.

Think about it!!!

School Dropouts

A couple of days ago, the Minister of Home Affairs, Yang Berhormat Pehin Udana Khatib Dato Paduka Seri Setia Ustaz Hj Badaruddin Bin Pengarah Dato Paduka Hj Othman stated that there should be no excuse for school dropouts due to financial issue. He is correct. But the fact still remains that we do have cases of children dropping out of schools due to financial constraints.

Whether we like it or not, we have to face the reality and try to resolve the issue. Some would argue that we need to "educate" the affected people about the value of education. Some would also argue that we need to raise the public awareness and help to alleviate the plight of these affected people. However, in my views the best possible solution shall be giving a salary to every school children in this country. And my reasons are as follows:

1. Reduce school dropout. Many students enter the employment world early for a simple, practical reason. They need the money. Some families encourage their children to do this, for the same practical reason. Even with scholarships, some families simply cannot afford to send their children to school, let alone university and beyond.

2. Grow the economy.

a. During a recession, an economy is starved for money. Salary payments to students would add growth money to the economy by providing jobs. (In this case, the job is to attend school.) Even without a recession, added jobs and added salaries help the economy grow.

b.  A more educated population will be better equipped to deal with tomorrow’s more advanced economies. The 30 occupations with the largest employment declines, all involved unskilled or semi-skilled labor, with no university education required.  In contrast, the majority of The 30 fastest-growing occupations, required university or advanced degrees.

c.  A more educated population will be better equipped to create tomorrow’s more advanced economies. Most technological advancements come from university-educated people.  Nations have suffered because of a so-called “brain drain,” meaning when the most educated people leave, the country has difficulty progressing.  Clearly, there is a relationship between education and economic growth.  For our country not to fall behind, we must continuously create more and better-educated people.

3. Improve our quality of life. Our country needs more doctors, nurses, scientists, chemists, architects and engineers of all types.  These are the people who will care for us and who will develop the medicines and medical techniques, the medical equipment and modern hospitals to improve our lives. In essence, we are investing for our country and people future.

4. Reduce the crime level. School drop outs are inordinately involved in crime. One could argue this is not cause/effect, but rather the type of person who drops out also is the type who has criminal tendencies. We disagree it’s a matter of type. Rather, the school dropout has fewer, attractive employment opportunities, and as a result, is drawn into crime. Crime may seem the only opportunity to have money. Take those young people off the street, put them in school and pay them money, and the crime rate will decline.

Can the government afford this? The answer is yes. This is because Brunei is monetarily sovereign nation. What does that mean? It means that our government has the ability and authority to create as much or as little as Brunei Dollar she wants. Government spending is not revenue constrained and never had been and never will be.

Brunei Economic Data

JPKE recently published FDI and IMTS for Q1 of 2011. From the report it indicates that FDI had increased to 121.8% from B$175.84 million to B$389.93 million in the same period of last year. As for IMTS, Brunei total trade had increased to 18.3%. So what do we make out of this information?

Well for a start, we continually to believes that Brunei need foreign fiat currency in order to develop our country. We show little faith in our own currency. It also indicates that we continually depleting our precious resources for the benefits of others. It is rather disheartening. 

On the same token, we took steps in persuading the country to save up. We introduce high import tax on vehicle. We proposing new electric tariff. We continually reminding people about the high subsidy given by the government as it if the country is running out of money and can no longer afford them. Isn't it ironic?!

I do not know why we continue to ignore the very fact that the Brunei can do the required investment herself. People need to realize that Brunei have the authority and ability to create her own money and invest in the country itself. My suggestion would be for Brunei to invest in herself. I propose that:

• Make electric cars and hybrid cars more affordable by eliminating the import tax.
• Give grants to the population in producing their own electricity.
• Build Light Railway System (LRT).
• Introduce nation wide school bus system.
• Seriously consider nuclear or geothermal energy.
• and many more.

As I said in my previous posting, going to work to produce real goods and services (such as oil and gas) to export for someone else to consume does us no economic good at all, unless we get to import and consume the real goods and services others produce in return. Put more succinctly: The real wealth of a nation is all it produces and keeps itself, plus all it imports, minus what it must export.

Imports are real benefits.  Exports are real costs.

Please do not get me wrong with my negative views. My sole intention is for our people to see the logic and applied all known facts in our pursuit of developing Brunei Darussalam. 

Food Price - Inflation

Had been monitoring our CPI for Food and Non-alcoholic beverages for awhile now. Came to the conclusion that they had been steadily increasing since 2004. The following graph is the result of my observation.

This reminds me about an articles carried by Brunei Times in February 1, 2011 titled "FAO sees January food prices close to record high".

This has been a recurring theme over the last several years and these activities were a principle reason why inflation rates increased in the period leading up to the crisis. Major international organisations like World Development Movement have associated these speculative forays with rising starvation. Their "The Great Hunger Lottery" report shows how such speculation on food has impacted on the poor around the world. Hunger and starvation escalated between 2007 and 2008 with over 1 billion people considered chronically malnourished at the time they prepared the Report. The major players in creating this havoc are Goldman Sachs, Bank of America, Citibank, Deutsche Bank, HSBC, Morgan Stanley and JP Morgan.

In my view, this speculation creates no widespread good and should be declared illegal. We should ban financial speculation on food prices. Reinforcing my views, below is the FAO Food Price Index from 1990 - 2011.

The rapid serial escalation in prices (starting around April to May 2007 and finishing in February 2008) followed by a serial plunge in prices is a classic sign that commodity price manipulation is occurring.

And today Brunei Times carried an articles titled "Shell-shocked investors flee to safe havens" where investors are now putting their money on farmland especially US farmland. We might be seeing again a replay of 2008 food riots. 

Therefore, we must advocate that FINANCIAL SPECULATION ON FOOD PRICES BE MADE ILLEGAL AND BAN. Too many people suffer from it with too few people benefiting from it.

Fool's Gold

Gold struck a record of US$1,877 an ounce on Friday, still on track for its biggest one-month rise in nearly 12 years in August and its biggest one-week gain since early 2009. Picture: AP

It is amazing and puzzling the mystical faith of gold on people. From a perspective, gold has minimum utility. Yes, some is used for jewelry and a bit for dentistry and electronics, but essentially gold is useless. At one time, its value was based on the same faith that supports some of the world major currencies. Today, its value is based on less faith than that, because major currencies at least, is supported by their sovereign government’s full faith. Gold is backed by nothing.

A sovereign government can control both the supply of, and the demand (interest rates) for, their currencies. That control over supply and demand gives the sovereign governments complete control over the value of their currencies. A sovereign government would have little to no control over the value of gold, a serious problem when trying to control an economy.

In short, gold is one of those commodities, the value of which is based solely on faith. Just as there have been real estate bubbles, stock market bubbles, oil bubbles, tulip bulb bubbles, sugar bubbles, coffee bubbles, diamond bubbles, dotcom bubbles and real estates bubbles, there have been gold bubbles, the biggest coming in 1980 and perhaps again, today.

The fact that people traditionally have coveted gold is irrelevant to today’s world economy. It also is irrelevant to the future safety of gold, which could disappear with the discovery of, for instance, a massive undersea or antarctic gold vein.

Because gold is supported by no nation, it is less safe than the dollar. Worse yet, it is expensive to own. While saving a dollar will earn you interest, saving gold will cost you for storage, insurance and shipping. In fact, if we were to try to sell or pawn it, we would be lucky to get half of the price we bought it in the first place. In essence it is a wasting asset, the value of which is based on the “greater fool” theory - “A fool buys it because he expects to sell it to a greater fool”.

To Be or Not To Be

Today read an online edition of Brunei Times paper. Came across a news about Creativity Market in Brunei. It featured an interviewed with the permanent secretary of the Ministry of Culture, Youth and Sports, Dato Paduka Hj Mohd Hamid bin Hj Mohd Jaafar. According to him:

.....The market for this sector is still at its infancy stage, he said. "Although there are suggestions to do theatre, we need to develop that market so that it will be sustainable."

Dato Hj Mohd Hamid said it may be warranted to get the government to support them at the initial stage, but at the same time, a market needs to be developed.

"This (is so) that people will appreciate it and spend money, as well as businesses investing in it so it will encourage people who want to make it their living," he said. 

Brunei is not yet there, he added.

"In the long run, if we create an environment whereby the sector can develop economically and commercially, then we are on the right track," he said, adding the government will help develop it......

To me, the government should take the leap of faith. A Malay proverb said that "Kalau nda pacahkan ruyungnya, macam mana kan mendapatkan sagunya" - rough English translation "No pain, no gain". Honestly, the government should ask herself, these 3 simple questions?

1. Does government investment create productive employment for those who would be otherwise unemployed?
2. Will the newly hired artist, directors, light technicians, stage managers, costume designers, script writers, best boys, drivers and etc have meaningful income that they can spend back into our country economy?
3. Is the output of the jobs adding to the capacity of goods/services demanded?

I sincerely believes that government investment in culture and arts shall add significantly to the well being our country. But if we continues to belittled with our country capacity then I am afraid we shall go no where.

"To be or not to be, that is the question" ~ Hamlet    

Incentives, Training for Jobseekers

Participants at the incentive-laden Work Training Scheme held yesterday. Under the "Skim Latihan dan Pekerjaan" (SLP) or Work Training Scheme, incentives are offered to participants at each level of their training. Picture: BT/Izam Said

Read an interesting news today in Brunei Times on the above subject. The government had introduced a so-called Skim Latihan dan Perkerjaan (SLP) or Work training Scheme. Brunei Times taunted it as an incentive-laden training scheme to help jobseekers secure employment in the private sector.

This reminds me a story about dog and bone.

Imagine we have 10 dogs and we bury 9 bones in a open field. We send out the dogs to find the bones. At least one dog will come back without a bone.

We decide the problem is lack of training and proper incentives. We put that dog through rigorous training in the latest bone finding techniques. After such intensive training, we continue to bury 9 bones and send the 10 dogs out again. The trained dog end up with a bone, but some other dog comes back without a bone (empty-mouthed, so to speak).

The problem, of course, is that there are not enough bones and jobs to go around. It is certainly true that well-trained and highly motivated jobseeker can easily find a job. But that is no evidence that aggregate unemployment is caused by laziness or lack of training. Even there are jobs available, many does not provide a person with a meaningful income. I know this as I had experience it myself.

In any case, I applaud such initiative taken by our government. But I also believes that we can better the initiatives. I would suggest that the government initiate a job guarantee (JG) program. Further information on this JG can be found on my previous posting. I would also suggest that the government extend the Elaun Sara Hidup and Elaun Kurnia Khas to all rather than currently being given to public servants only.

I sincerely believes that JG and the extension of such allowances shall provide the populace with a meaningful income. With the right income, our people can properly "live" and contribute back to the economy of which ensure further prosperity to our country, Brunei Darussalam.

Again as a monetarily sovereign nation, our government can provide such incentives without busting her coffers.

p/s: The dog and bone is just an example and it certainly does not equate our people as dog. 

Government Money

In today's Brunei Times editorial column, came across where some youths telling their peers not to rely heavily on government aid at a public gathering, was found to be refreshing according to the editor. That statement is rather simplistic view.

Where do you get the money you use to buy your stuff? And where did the guy who gave you the money get his money? Where did all this money going around the economy come from? Somebody is willing to spend to buy someone else's service. Where did that first buyer's wealth come from? If he's Bill Gates, he earned it selling software. Now where did the people who bought his software get their money from? Surely, a hundred years ago, there wasn't enough money going around the economy to pay for all the software that Bill Gates and co. have sold us, and are still selling us. Where is all this new money coming from? Who is creating this? A hundred years ago, there was just enough money going around as needed, give or take, a few million people going hungry. Now, we have billions of people, and trillions of money circulating around the world economy.

If you say from banks giving credit, you are almost there. But given that banks do not lend to anyone they don't think will pay them back, where does the bank think their borrowers will get their repayment money from? Don't they get afraid that money will eventually run out, and ALL their borrowers will default? How is it that the economy, after growing into the trillions, still hasn't melted down completely? If all this new money is debt-based, isn't it inevitable that we get back to the size of the world economy 200 years ago, or some point when most people and businesses did not have debt?

In an economy such as Brunei, our government should spend her money on people who will readily turn around and buy services from others in the economy. This means government buying services from the individuals who would have otherwise had no income because of those hoarding their income.

Cheers!

Poverty in Brunei

(Top) Amalina (Below), president of Brunei Youth Association presenting donations to some of the needy children in Brunei. (Above) One of the heads of an underprivileged family receiving donations from BYA and Muslimah 'Prihatin' group. Picture: BT/Koo Jin Shen

Self was browsing through Brunei Times online paper today, when I encounter an editorial piece about a local NGO called Believe Youth Association (BYA). This NGO had been making strides in trying to tackle poverty issue within the sultanate. For the past few days, BYA had been busily making rounds especially within Brunei Muara district in helping unfortunate individuals and families. BYA had been donating cash up to organic garden kits.

From me, well done BYA!

However, I wish to point out that such efforts made by BYA or any other NGO's will not be sustainable in the long run. Furthermore, there is a danger that we unintentionally create a culture of "receiving" from these unfortunate individuals and families. Please do not get me wrong. I fully support any efforts to eliminate poverty in Brunei. At the same time I also believes that there are much better ways to eliminate poverty.

By now, you should have a good idea on my standing about monetary issues. If not, please take some time to read my previous postings on this blog.

As a monetarily sovereign nation, Brunei have the privilege to do the following:

• Provide public jobs to every willing, ready and able citizens and permanent residents at a minimum wage set out by the government.
• Give salary to all schoolchildren within the sultanate for attending schooling.

It is my observations that these unfortunate people have a common fundamental problem, which is Acquisition Ability (AA) - people's ability to acquire what they want. I sincerely believes that the government have the means and capabilities to address the AA issue. By addressing the AA issue, we are giving these unfortunate people a much better fighting chance to lift themselves out of the poverty trap.

As I had mentioned many times before, our government can afford to provide public jobs to all her citizens and permanent residents and also giving salary to all schoolchildren without breaking the government coffers. In fact, our government can afford to pay any services being rendered even with the oil and gas or all her overseas investments failed. It does not stop the government from functioning by a single cent!!

Think about it....

The End of Bretton Woods - Gold Standard

Delegates attend the Bretton Woods conference in July of 1944 at the Mt. Washington Hotel in Bretton Woods, New Hampshire. Alfred Eisenstaedt / Time & Life Pictures / Getty

Few people had realize that today it had been 40 years since the end of Bretton Woods a.k.a the Gold Standard system. On August 15, 1971, then President Nixon of the United States, announced the "temporary" suspension of the US dollar's convertibility into gold. By closing the gold window, he effectively ends the Brentton Woods.

Established in 1944 and named after the New Hampshire town where the agreements were drawn up, the Bretton Woods system created an international basis for exchanging one currency for another. It also led to the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development, now known as the World Bank. The former was designed to monitor exchange rates and lend reserve currencies to nations with trade deficits, the latter to provide underdeveloped nations with needed capital — although each institution's role has changed over time. Each of the 44 nations who joined the discussions contributed a membership fee, of sorts, to fund these institutions; the amount of each contribution designated a country's economic ability and dictated its number of votes.

In an effort to free international trade and fund postwar reconstruction, the member states agreed to fix their exchange rates by tying their currencies to the US dollar. American politicians, meanwhile, assured the rest of the world that its currency was dependable by linking the US dollar to gold; $1 equaled 35 oz. of bullion. Nations also agreed to buy and sell US dollars to keep their currencies within 1% of the fixed rate. And thus the golden age of the US dollar began.

However, by 1971, the US economy was running into troubles. The cost of Vietnam war had a tremendous effect on the US economy. Inflation was running high. Nations began demanding more gold from the US - France, in particular, had repeatedly made aggressive demand for US gold. And also due to other factors, President Nixon then finally decided to end the Brentton Woods for good. This was called the Nixon Shock.

In reality, with the demise of the fixed exchange rate system – and by implication the introduction of the fiat monetary system – it had provided governments the opportunity to pursue domestic policies without tying monetary policy to defending the parity. But, sadly today, many people failed to realize this. People still locked in the gold standard mentality and continue to make fiscal and monetary policies according to defunct gold standard. This can be seen with many nations currently promoting austerity measures.

Without the gold standard, government has the ability to sustain full employment, pursue national development, reduce the poverty gap, provide free healthcare, free education and many things that government ought to be doing. There is no such thing of government being revenue constrained. This include our country, Brunei Darussalam. Our government can aggressively pursue her national development agenda and achieve her 2035 vision. In fact, I sincerely believes that our country can achieved her 2035 vision within 5 to 10 years time if only we realize that our currency is not being tied down to how much oil and gas being sold to Japan and Korea.

Foreign Direct Investment

Brunei Shell's oil refinery in Seria, Belait. China's Zhejiang Hengyi Group has been given the green light to build a  US$6 billion oil refinery and chemical plants in Brunei - Picture: BT/Saifulizam

Early of this month, it was reported in the local paper, that our government has given the green light to a Chinese company to develop a US$6 billion oil refinery at Pulau Muara Besar (PMB).

It was certainly a good news. If my memory serve me right, this so called development plan for PMB had been going on and off since 2003!..How times do fly!

Anyway, what intrigue me as to why the country had to wait for FDI to develop PMB? Can't our country invest in her own land? I found it a bit odd that BEDB had been waiting all this years for other people's fiat money to develop the country. What is wrong with our Brunei dollar? Is it not good enough?

All these questions really baffled me. Brunei is a monetarily sovereign country. It has the exclusive right to create Brunei dollar. IMF, ADB, World Bank, UN, ASEAN, OIC, or any other international organizations or agencies can not tell Brunei not to create Brunei dollar. Brunei can create the Brunei dollar as much or as little as she wants.

If the government do not want to create another bureaucratic public department, she can always create another Government Link Company (GLC).  Brunei had created many GLCs before such as RBA, Semaun Holdings, TAIB, BIBD, DST, Dorchester Hotel Groups, Petroleum Brunei and many more. Why do Brunei need a foreign entity to develop PMB?

Brunei had plenty of experiences in developing and running an oil refinery. A good example is Seria Oil Refinery. It was built 1983 and currently being manned by our local. Surely 28 years of running and operating an oil refinery at Seria do count something, isn't it?

Thus, I am at lost as to why our country needs other people money to built another oil refinery in Brunei?! Where is that "Brunei Yakin" slogan?.....A malay proverb said "Tepuk Dada Tanya Selera".

As I pointed out many times in my previous postings, when it come to developing the country, Brunei is not revenue constrained. I only wish that our fellow country men and women have the confidence and understanding that Brunei itself has the money, expertise and experience to develop the country.

Brunei must speed up RKN projects

Came across on the above title in today's Brunei Times - August 13, 2011. Couldn't agree more on what had been mentioned by the head of CSPS, Dato Paduka Dr Haji Ismail in the article. 

Seriously, our country, Brunei Darussalam is in the coldrum economically. The GDP had been rather a flatliner since 2006 - GDP figures: 4.4% in 2006, 0.2% in 2007, -1.9% in 2008, -1.8% in 2009. On the same token our neighbors had been blazing through with >6% of GDP annual growth. During that same reporting period, our CPI had been steadily increasing from 0.2% in 2006, 0.3% in 2007, 2.7% in 2008 and 1.8% in 2009.

From the above, it is my observation and contention that our country had been experiencing an episode of STAGFLATION for the last 5 years. An episode of mediocre economic growth with steady increase of inflation. I am wondering if JPKE, BEDB and MOF is fully aware of the situation.

So what can the country do about it? Can stagflation be cured? Yes it can! and it is quite straight forward things to do.

Before embarking on the remedies we need to understand the word STAGFLATION. It is a combination of two words - Stagnate and Inflation. Brunei is currently facing a stagnate growth and an increasing inflation.

As Dato Paduka Dr Hj Ismail pointed out in the article, Brunei need to seriously embark on implementing the RKN projects soon rather than later. Our government needs to spur economic activities with massive spending. Current allocation of B$1.05 billion (2011/12) for developments just does not cut it anymore. This had been shown many times with the annual state budgets that were being approved. Time after time, the budget is just too small for the country's current needs and population expectations. A malay proverb would say "tahi gigi pun nda cukup". Furthermore, the local is not reaping the benefits that arises from government spending.  In my observation, it was the foreigner that had been laughing all the way to the bank!

Having said that, Brunei do needs to do serious spending. I mean real serious spending. How do we know that Brunei is spending correctly? We need to test it with these 3 simple questions:

1. Does the public spending create productive jobs for those who would be otherwise unemployed?
2. Will the newly hired workers have meaningful income that they can spend back in the economy?
3. Is the output of the jobs adding to capacity of goods and services demanded?

If the answers to all the above is YES, then spend! The country needs that spending. The population needs more Brunei dollar and only government has the capacity and authority to create and issue Brunei dollar. In my perspective, government spending create population wealth.

So that's how you cure stagnation - massive government spending.

Now, coming to inflation. Majority of us would say that if government initiate massive spending, then inflation will follow suit.  However, if you had been observing the business news, you will notice that countries tackle their inflation with the manipulation of  the country's interest rate.

High interest rate reduce inflation as people save up - taking advantage on saving rates being offered.  It also make people borrow less money as high interest rate is burden to a borrower.  High interest rate also make a country currency appreciate higher thus making imports cheaper. And vice versa for low interest rate situation.

Now with AMBD (defacto Brunei Central Bank) in existence, the government has the ability to manipulate the county's interest rate. Or the government can always reduce its spending, however that would be an extreme case.

In summary, Brunei is currently experiencing stagflation.  To overcome this economic malaise, government must initiate massive public spending. At the same that public spending must benefit the local either through  employment or business opportunities.

Exporting for Prosperity....huh?!

A lot of people have the impression that a country needs to export something for the good of that particular country. Even some quarters of the mainstream economists, media and politicians agrees with the above statement.  In fact every Tom, Dick and Harry agrees that a country needs to export something for its prosperity!

Well, I have a problem with the notion.....exporting for prosperity!

Let's me start by ask this question.  What is the sole purpose of Brunei exporting her oil and gas overseas all these years?  The last time I checked, it was a mean for our country earning hard currencies.  The idea was that with these hard currencies, they are shall be used for developments, investments and savings of Brunei Darussalam.  In fact the currencies that Brunei had been accumulating through the export of oil and gas are foreign currencies and it is not Brunei currency.

Since 1971, after the world abandon gold standard currency and adopt fiat currency, Brunei had been accepting and accumulation other's people fiat currencies - A currency that is being created without the backing of any tangible commodities such as gold but instead being backed up with faith of that issuing country.  

So if our government had been accepting these foreign currencies as payment of Brunei's oil and gas exports, how come we only see or use Brunei Dollar in our everyday transaction? Where this Brunei dollars come from? Did it fell from the sky? Did Singapore create Brunei dollar?

It is ironic that those foreign currencies that our country had been accepting all these years can not be used in Brunei as everyday medium of transaction.  Had any of you seen people paying for nasi katok with rupiah, yen and etc?  Never, isn't it!  Do you know why?  Because those foreign currencies are not legal tender in Brunei Darussalam.  The only legal tender in Brunei Darussalam is Brunei Dollar or Ringgit - B$.  And the best of all, only His Majesty Government of Brunei Darussalam have the exclusive authority to create Brunei dollar.

So does it make sense for us to export oil and gas, then accumulate other's people fiat currencies and then knowing very well that those currencies can not be used in Brunei Darussalam?!...It's not, isn't it?!

From my perspective, going to work to produce real goods and services (such as oil and gas) to export for someone else to consume does us no economic good at all, unless we get to import and consume the real goods and services others produce in return. Put more succinctly: The real wealth of a nation is all it produces and keeps itself, plus all it imports, minus what it must export.

Imports are real benefits.  Exports are real costs.

So how can we develop our country?  Since our government have the exclusive authority to create Brunei dollar, my suggestion would be for our government to create more Brunei dollar and start initiating of buying real goods and services. That's how.  Our country needs more housing, universities, hospitals, police, fire, teachers, forest rangers, develop PMB, grow more rice, rear more cattle, goats, fish and etc. Brunei do not needs to export her resources for her development, she needs to import other people resources for her development.  Brunei needs MRT, needs electric cars, solar panels, wind trubines and etc.  All these can be done if the country is willing to create more Brunei dollar and start importing or making those stuffs!

The fact is government spending is better in simulating development in Brunei than exporting because government spending does not require us to send valuable goods such as oil and gas overseas.  We can keep them right here, enriching Brunei Darussalam. 

So in summary, more government spending is identical to exporting. Both activities add more money to Brunei's economy.  However, government spending has the advantage of not requiring us to send our valuable goods and services overseas.

What is more interesting, with every country in this world all have the same mentality of exporting to prosperity, I suggest that our country, Brunei Darussalam SHOULD take full advantage of this.  Importing all the required goods and services in order to achieve her 2035 vision.  In fact that vision can be achieved in 5 to 10 years time and not by 2035!

Salaried Schoolchildren

During his recent birthday titah, His Majesty announced the introduction of 3 educational schemes under the Human Resource Fund.  The aim of this educational schemes is to assist our "drop-out" schoolchildren in getting them the right qualifications for potential job vacancies.  

"I feel that this group (of people) need help to undergo appropriate training to increase their chances of getting jobs," - His Majesty.

To add further I would also proposed that our school children (from kindergarten upwards) to be paid a salary.  My reasons for the proposal are as follows:

1.  Reduce school dropout.  Many students enter the employment world early for a simple, practical reason.  They need the money.  Some families encourage their children to do this, for the same practical reason.  Even with scholarships, some families simply cannot afford to send their children to school, let alone university and beyond.

2.  Grow the economy.

a.  During a recession, an economy is starved for money.  Salary payments to students would add growth money to the economy by providing jobs.  (In this case, the job is to attend school.) Even without a recession, added jobs and added salaries help the economy grow.

b.  A more educated population will be better equipped to deal with tomorrow’s more advanced economies.  The 30 occupations with the largest employment declines, 2008-18, all involved unskilled or semi-skilled labor, with no university education required.  In contrast, the majority of The 30 fastest-growing occupations, 2008-18 required university or advanced degrees.

c.  A more educated population will be better equipped to create tomorrow’s more advanced economies.  Most technological advancements come from university-educated people.  Nations have suffered because of a so-called “brain drain,” meaning when the most educated people leave, the country has difficulty progressing.  Clearly, there is a relationship between education and economic growth.  For our country not to fall behind, we continuously must create more and better-educated people.

3. Improve our quality of life. Our country needs more doctors, nurses, scientists, chemists, architects and engineers of all types.  These are the people who will care for us and who will develop the medicines and medical techniques, the medical equipment and modern hospitals to improve our lives.

4.  Reduce the crime level. School drop outs are inordinately involved in crime. One could argue this is not cause/effect, but rather the type of person who drops out also is the type who has criminal tendencies.  We disagree it’s a matter of type.  Rather, the school dropout has fewer, attractive employment opportunities, and as a result, is drawn into crime.  Crime may seem the only opportunity to have money.  Take those young people off the street corners, put them in school and pay them money, and the crime rate will decline.

Budget Surplus

According to JPKE 2009 BDKI report, Brunei Darussalam had been running budget surpluses since 2006 or maybe more. In 2006, the budget surplus was reported at B$3.9 billion; In 2007 it was B$4.1 billion and in 2008 it was B$5.6 billion. 

So is it good?.....well on microeconomics level, it is good. But on macroeconomic level, well it is a different ball game.

In essence, majority of people get very confused about the concept of national saving.  They assume that saving is spending less than you earn and then apply that to budget surpluses and conclude that the surpluses add to national saving. But this view is erroneous.  A monetarily sovereign government does not save. What sense does it make to say that the government is saving in the currency that it issues?  Households save to increase their capacity to spend in the future. How can this apply to the issuer of the currency who can spend at any time it chooses?

A simple example helps reinforce these points.  Suppose the economy is populated by two people, one being government and the other deemed to be the private (non-government) sector.  We abstract from the distinction between the external and private domestic sectors here – which mostly only involved distributional considerations anyway.

If the government runs a balanced budget (spends 100 dollars and taxes 100 dollars) then private accumulation of fiat currency (savings) is zero in that period and the private budget is also balanced.

Say the government spends 120 and taxes remain at 100, then private saving is 20 dollars which can accumulate as financial assets.  In the first instance, they would be sitting as a 20 dollar bank deposit have been created by the government to cover its additional expenses.  The government deficit of 20 is exactly the private savings of 20.

If the government continued in this vein, accumulated private savings would equal the cumulative budget deficits.  The government may decide to issue an interest-bearing bond to encourage saving but operationally it does not have to do this to finance its deficit.  If the savers transfer their deposits into bonds their overall saving is not altered and it has no implications for the government’s capacity to spend.  It has the advantage for savers that they now also enjoy an income flow from their saving.

However, should government decide to run a surplus (say spend 80 and tax 100) then the private sector would owe the government a net tax payment of 20 dollars and would need to sell something back to the government to get the needed funds.  The result is the government generally buys back some bonds it had previously sold.  The net funding needs of the non-government sector automatically elicit this correct response from government via interest rate signals.  Either way accumulated private saving is reduced dollar-for-dollar when there is a government surplus.

So it is clear that the government surplus has two negative effects for the private sector: 

1. The stock of financial assets (money or bonds) held by the private sector, which represents its wealth, falls.
2. Private disposable income also falls in line with the net taxation impost.

Therefore, the argument that budget surpluses represents “public saving”, which can be used to fund future public expenditure is superficial.  Public surpluses do not create a cache of money that can be spent later. Governments spend by crediting a reserve account in the banking system.  The credits do not “come from anywhere”, as, for example, gold coins would have had to come from somewhere.  It is accounted for but that is a different issue.  Likewise, payments to government reduce reserve balances.  Those payments do not “go anywhere” but are merely accounted for.

There is an elaborate institutional structure in place to obsfucate the true nature of these transactions. But in an accounting sense, when there is a budget surplus, then base money and/or private wealth is destroyed. The opposite is the case for budget deficits.

Now, coming back to the 2009 BDKI report, Brunei Darussalam GDP's during that reporting period was 4.4% in 2006, 0.2% in 2007, -1.9% in 2008 and -1.8% in 2009.

Is it a coincidence? I'll leave it to you to judge.

Job Guarantee For Every Brunei Citizens and Permanent Residents

The Public Works Department received a huge turnout of jobseekers at its main headquarters. Picture: BT/Saifulizam

Sometime in May of this year, our Public Work Department (PWD) announces job openings for daily paid. It was estimated 14,000 applications were received by PWD.

From one perspective, it was good effort on behalf PWD in assisting the locals in finding a job. Another perspective, it shows that our country have unemployment or lack of employment issue. 

So what can Brunei Darussalam do to alleviate such issue?

A monetarily sovereign government such as our country, Brunei Darussalam can unconditionally offer a public sector job at a minimum wage to any person that is willing and able to work.  With this it established and maintained a buffer stock of employed workers.  This so called buffer stock of employed workers shall expands or declines when ever the private sector activity declines or expands respectively.

Our government is offering to purchase a resource that currently do not have market value i.e. a zero bid input.  The government expands her spending not by competing with other resource users but utilising an unemployed resource. This shall be noted as a spending on a price rule rather than a quantity rule.

Normally, government tends to spend on quantity rules i.e. government plan a budget deficit of certain size and allocate program budgets to match.  It is believed that this approach is flawed as it relies on the government to being able to exactly predict the spending gap that the deficit needs to fill.  It is also believed that this approach cause the likelihood of under spending and thus leaving labour resources unemployed high.

From current perspective it is much better on having some leeway in the budget with the spending gap is being closed with an employment guarantee.  This entails that the government shall be able in creating “loose” full employment i.e. procuring or buying labour at zero bid rather than competing in the market for it. Hence, the deficit shall be whatever it had to be i.e. exactly the right size relative to the GDP.

Job applicants are seen queuing up at the Public Works Department Headquarters at the Old Airport Road in Berakas. Picture: BT/Courtesy of Public Works Department

Job Guarantee (JG) acts as an absorption function which is to minimise the real costs that is currently being associated with the flux of the private sector.  In essence, a declining or stagnating private sector employment will automatically make the public sector employment react and increased its payrolls.  This shall make the nation remains fully employed, with only the mix between private and public sector employment fluctuating as it responds to the spending decisions of the private sector.  Please note that JG wage is open to everyone and thus it shall functionally become the national minimum wage.

To some, JG being equated as purely a public sector job creation strategy. However, it must be appreciated that JG is a macroeconomic policy framework. It is designed to give a full employment and price stability. This is based on the principle of buffer stocks where job creation and destruction is but one component.

Brunei Darussalam can fairly quickly introduce this JG as she has the fiscal capacity to run the JG.  She do not have the difficulty in creating demand for her currency.  She have a taxation, welfare and other administrative procedures which allows her to engage the population.  Brunei Darussalam also have a robust checks and balances which do not prevent corruption but tend to make it harder to become entrenched.

A country that is not monetarily sovereign may not have the fiscal capacity to engage the JG without raising revenue first.

In implementing this JG, it inherently comes with an inflation control. There can not be an inflationary pressures arising as the Government is offering a fixed wage to any labour that is unwanted by other employers. JG is basically, the government “buying labour off the bottom” rather than competing in the market price because there is no market demand for their services.  JG shall offers a minimum wage to anyone who wants it.

Monetarily Sovereign Nation

I wish to share with you about "What it meant to be Monetarily Sovereign".

Brunei Darussalam is truly a sovereign nation. Being a sovereign nation, it also enjoys the ability to create her own sovereign currency i.e. Brunei Dollar or Brunei Ringgit.

What does it meant to be a Monetary Sovereign nation? As a monetary sovereign nation, Brunei Darussalam:

a. Has the exclusively unlimited authority to create Brunei Dollar / Brunei Ringgit.

b. Can not be forced into bankruptcy.

c. Can pay bill of any size at any time, by creating Brunei Dollar.

d. Do not require revenue (tax or oil & gas royalties) to spend.

Countries such as Greece, Ireland, Spain, Germany, France, Italy, Portugal and other euro zone countries, although sovereign nations, they are not monetarily sovereign. These countries are on Euro standard i.e. they use Euro as their national currencies.

Sarawak, Sabah, Melacca, Perak, and etc are also not monetarily sovereign. They use Malaysia Ringgit as their national currencies.

Bill Gates, Lee Kuan Yu, Warren Buffet, Obama, Putin, You and me are not monetarily sovereign. As a private citizen, we are prohibited by law from creating our own currency.

Having this information, two questions come into mind:

a. How much money CAN our Government create? The short answer is INFINITE.

b. How much money SHOULD our Government create? Up to the threat of uncontrollable inflation.

If our people have this basic understanding of monetary sovereign facts, I sincerely believes that Brunei can achieved her 2035 vision in 5 to 10 years time rather than to wait until 2035.

Brunei Dollar

You may have seen your bank; you may have seen her safe deposit box. But have you ever seen your saving or current account?

No, you haven’t.  Your account is not a physical reality.  It is an accounting notation.  You could travel to your bank, and walk into the lobby, and you would not be one inch closer to your account than if you had stayed home.

When you receive a printed banking account statement, you receive evidence you own the dollars in your account.  But, you never will see those dollars.  They too, are not physical realities, but rather, accounting notations.  In fact, you never will see a dollar, anywhere.

A Brunei dollar bill is not a Brunei dollar.

A Brunei dollar bill is a piece of paper telling the world the bearer owns a Brunei dollar.  When you own a car, you have a document telling the world you own that car.  The document is called a “blue card”.  The blue card is not the car.  You can’t drive a blue card.  It’s just evidence of ownership.  Your Brunei dollar bill is evidence you own that invisible Brunei dollar.

A Brunei dollar has no physical existence.  You can’t hold a Brunei dollar. A Brunei dollar has no more substance than does a number.  You can’t hold the number “one”.  You can’t carry the number “ten”.  When you write a cheque, from your invisible account, that cheque is a set of instructions telling your bank to debit your current account and to credit the payee’s current account.

One account is debited and another account is credited.  No Brunei dollars move. They can’t.  They aren’t physical.  The peso, the euro, the ringgit, the pound, the yuan, the yen – none of the world’s currencies are physical.  They all are accounting notations.

Most governments have been Monetarily Sovereign since they went off the gold standard in 1971.  Money creation no longer is limited by the availability of gold. Monetarily Sovereign government can pay any bill of any size at any time, merely by sending instructions to banks to credit bank accounts.  The world’s financial structure is based on instructions to banks.

When you hold a Brunei dollar, who owes you what?  The Brunei government owes you full faith, which may not sound like much, but actually is powerful.  It means:

• The government will accept Brunei currency in payment of taxes.
• It will pay it’s debts and its bills with Brunei currency.
• It will force all your domestic creditors to accept Brunei currency, if you offer it, to satisfy your debt.
• It will not require domestic creditors to accept any other money.
• It will maintain a market for Brunei currency.
• It will continue to use Brunei currency and will not change to another currency.
• All forms of Brunei currency will be reciprocal, that is five B$1 bills always will equal one B$5 bill and vice versa.

In summary, a Brunei dollar has no physical reality.  Neither does a banking account or any other account, debt, deficit, inflation, recession, depression, stagflation or money.  All these terms are descriptive of accounting notations.  The government can change any of these simply by typing into a computer.

Brunei dollars do not physically move, because they don’t physically exist.  When the government pays a debt, you may imagine dollars moving out of some government storage place into a creditor’s bank. But, there is no storage place; there is no movement.  The government sends instructions to the creditor’s bank. That’s it.  A Monetarily Sovereign government never can run out of instructions.