FDI in a nutshell

Some extreme view on FDI.......

Great Rush for Brunei Money's

For the past few days, there had been plenty of high profile delegations coming into Brunei. We have Malaysian, Indonesian and Uzbekistan going into great length in trying to woo our government to invest into their respective countries. Whilst at the same time our country also trying very hard to lure in foreigners investing in our country.

I found this to be very amusing. Why?

In one hand, we have foreigners clamoring for our Brunei dollar. On the other, we have our government clamoring for foreign currencies (FDI). It is comical, isn't it?

In any case, who do you think will have a better deal at the end of the day?

I'll give you a hint. Creating Brunei dollar does not involve plundering our resources. In this era, creation of Brunei dollar is mostly digital. That's right, our government create Brunei dollar with few keystrokes on the computer keyboard. The same applies for other countries. They create their money the same way as Brunei did.

Now again, who do you think will have a better deal?

iPad for all Brunei students

Read an interesting article in today's Brunei Times. It is about a proposal made by a Houghton Mifflin  Harcourt to our government about adopting iPad based learning.

Further reading can made on this link:

http://www.bt.com.bn/news-national/2011/09/14/ipad-based-learning-eyed-sultanates-classrooms

My views that our government should take up that suggestion. The reasons are as follows:

• Our country can afford to provide iPad to every students in the country.
• We are exposing our children to computer at an early stage of their education.
• We are leveraging technology on our education as envisaged in the 2035 vision.
• Preparing our people for Knowledge Based Economy.
• Reduce our schoolchildren burden in carrying multiples, heavy textbooks and workbooks to school.
• Engage the schoolchildren more on learning through its apps creativity.

Hopefully, the government will not take long to decide in embracing such idea.

A personal musing - Do jobs matter?

What is the future of jobs? Are we wrong to focus on job creation?

It is thought that Brunei suffers from a shortage of jobs. I suggest that may not be true. Rather, Brunei suffers from a shortage of money.

It began with the Industrial Revolution. Since then, machines have done more work that people once did. Machines chased people off labor-intensive farms to manufacturing and white collar work. Then, machines run by people, chased people off those jobs. Soon, machines run by computers began to take over. But someone had to build and program the computers, so jobs in electronics industries expanded. Now computers have begun to build and program computers.

So from where will the next jobs come? And does it matter?

Most people really don’t want a job; they want money. Yes, some jobs may offer personal satisfaction, and may occupy otherwise dull hours, but for most people seeking jobs, money is the primary goal.

Wait! People do not want money. They want what money will buy. They want more security, better shelter, food, clothing, health care, education. They want admiration. They want envy. They want accomplishment. They want to win.

O.K, money can’t buy everything, but it can buy much of what people want. A jobs is a means to obtain money, which in turn is a means to obtain the things we want. And that Rube Goldbergian “means-to-a-means-to-a-means” connection is being superseded by machines.

Those who have seen the “Star Trek, The Next Generation” TV series or its movies are familiar with the “replicator.” It can synthesize any non-living product, seemingly out of thin air. If such a device existed today, our money and job needs would decline radically. Yes, we might continue to work for satisfaction, for creativity, or to fill otherwise-empty hours – but not so much for money, since there would be little need for money other than perhaps to pay for some services. The replicator could supply our product needs.

Replicators may seem far off, but we are evolving in that direction, where machines supply more and more of our product needs. And as that happens we butt up against what will be increasingly difficult questions: Why must we work to obtain money – and why must people struggle to find jobs to obtain money – especially since money is free?

That’s right. Money is free. Brunei government has the infinite ability to create money out of thin air. In essence, our government is a “money replicator.” At the touch of a button, the government could supply each of us with unlimited money. Want $1 trillion? No problem. Here, take $2 trillion. There is no physical money; it’s all just data, and data is infinite.

Extreme amounts of money creation would reduce the value of money (aka “inflation”), but the point is this: There is no fundamental reason why anyone in Brunei should lack food, clothing, shelter, education, health care simply for lack of a job. There is no job-related reason for poverty in Brunei. Our “money-replicator” government has the power to lift everyone from poverty and supply all their basic needs.

This brings us to an important difference between why people want to work and why the economy wants people to work. While people work to obtain goods and services, the economy wants people to work to create goods and services. If we all owned replicators, and if no one worked, eventually we would have no progress and no services, and the economy would collapse.

There may be a compromise, between where we are today and an economy with no jobs at all. We not sure exactly where that compromise is, and surely it would change over time, but here are a couple of “what-ifs.” What if:

– The government’s “money replicator” gave every man, woman and child enough to pay for food, clothing, home, health care, entertainment and education through college — i.e. ended poverty?

– Those who wanted more than basics could work, but the standard, legal work days were lowered from 8 hours to 6 hours to 4 hours or less, providing more jobs for all who wanted them?

– Government taxes or bills, being unnecessary, were phased out?

Of course, the devil is in the details. What about Inflation? Motivation? Progress? International relations? I believe we eventually will loosen the connection between jobs to money to goods and services. It won’t be “if” but “when,” and it will be an improvement over our current situation of too much joblessness, poverty, illiteracy, homelessness, sickness and struggle.

Time and energy devoted to the creation of jobs may take us down the wrong path. Perhaps we should focus on the creation and distribution of money.

Other People's Money

Yesterday, Brunei Times (BT) carried an article about a consortium of Japanese oil firms, planning to invest 700 to 800 billion Yen in developing a large scale natural gas project in Brunei.

I purposely highlighted the numbers because I want the readers to understand the meaning of it.

As majority of you quite aware, Yen is not acceptable in Brunei. Furthermore, Yen is a fiat currency created by the Japanese Government. It is not being backed up with Mount Fuji. It is just a piece of paper or computer bits. And yet we are accepting them without question and stand ready to commit our resources for the Japanese people.

This so called investment is intriguing and prompt the question, what is wrong with Brunei dollar? Is it not good enough for investment? If it is not good enough, then why bother creating Brunei dollar in the first place?

Please note that I am not being negative about the so called investment. However, I am concern with the notion or mentality of some people that we need foreign currencies to develop Brunei. Furthermore, we are undermining our resources for other people prosperity.

Our oil and gas is a finite resources and not renewable. Imagine if we were to runs out of them, what should we do then? Sell our soul next?

From my perspective, going to work to produce real goods and services, to export for someone else to consume does 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 keep itself, plus all imports, minus what it must export.

Think about it....

Inflation

Today's entry I am considering inflationary pressures that arise from nominal demand (spending) growth outstripping the real capacity of the economy to react to it with output responses. In other words, I am excluding inflation that may arise from supply shocks – such as a rise in an imported raw material (for example, oil). That is another issue altogether.

The reason I am excluding supply-driven inflationary impulses is because the mainstream attack on the current use fiscal policy (and monetary policy) is really about demand pressures. We are continually reading crude statements such as there is “too much money” in the system.

Further, the mechanisms through which the supply shocks manifest are different and this deserves a separate analysis, which will come in a subsequent posting.

However, the solution to both sources of inflation is not that dissimilar although additional measures might be brought to bear to handle the case of a price hike in an imported raw material.

First we should make sure what we are talking about. Many conservative commentators think that when workers get a pay rise it is inflation. It is not. Those on the left think that when the corporate sector increase the price of a good or service it is inflation. It is not.

It is also not inflation when the exchange rate falls pushing the price of imports up a step. So a depreciation in the currency does not constitute inflation. It might stimulate inflation but is not in itself inflation.

It is also not inflation when the government increases a particular tax (say the VAT or GST) by x per cent to some new level.

So while a price rise is a necessary condition for inflation it is not a sufficient condition. Observing a price rise alone will not be sufficient to categorise the phenomena that you are observing as being an inflationary episode.

Inflation is the continuous rise in the price level. That is, the price level has to be rising each period that you observe it. So if the price level or a wage level rises by 10 per cent every month, then you have an inflationary episode. In this case, the inflation rate would be considered stable – a constant rise per period.

If the price level was rising by 10 per cent in month one, then 11 per cent in month two, then 12 per cent in month three and so on, then you have accelerating inflation. Alternatively, if the price level was rising by 10 per cent in month one, 9 per cent in month two etc then you have falling or decelerating inflation.

If the price level starts to continuously fall then we call that a deflationary episode.

Hyper-inflation is just inflation big-time!

So a price rise can become inflation but is not necessarily inflation. Many commentators, economists and ordinary folks get this basic understanding wrong – often and continually.

What Back Up Currency and Why Would Anyone Accept It

Last month the concept of a sovereign currency was introduced in this blog. We have all learned that our currency is “fiat” - it has “nothing” backing it up. Well, maybe “something” - but we don’t necessarily want to see what is behind Pehin Rahman’s “curtain”.

So today, let us take a peek behind the currency. Is there anything there, other than the Pehin Rahman’s - how shall we put it - family jewels?

What “backs up” domestic currency? There is, and historically has been, some confusion surrounding sovereign currency. For example, many policy makers and economists have had trouble understanding why the private sector would accept currency issued by government as it makes purchases.

Some have argued that it is necessary to “back up” a currency with a precious metal in order to ensure acceptance in payment. Historically, governments have sometimes maintained a reserve of gold or silver (or both) against domestic currency. It was thought that if the population could always return currency to the government to obtain precious metal instead, then currency would be accepted because it would be thought to be “as good as gold”. Sometimes the currency, itself, would contain precious metal—as in the case of gold coins. In the US, the Treasury did maintain gold reserves, in an amount equal to 25% of the value of the issued currency, through the 1960s (interestingly, American citizens were not allowed to trade currency for gold; only foreign holders of US currency could do so).

However, the US and most nations including Brunei have long since abandoned this practice. And even with no gold backing, the US currency is still in high demand all over the world, so the view that currency needs precious metal backing is erroneous. We have moved on to what is called “fiat currency” - one that is not backed by reserves of precious metals. While some countries do explicitly back their currencies with reserves of a foreign currency (for example, a currency board arrangement in which the domestic currency is converted on demand at a specified exchange rate for US Dollars or some other currency), most governments issue a currency that is not “backed by” foreign currencies. In any case, we need to explain why a currency like the Brunei or US Dollar can circulate without such “backing”.

Legal tender laws. One explanation that has been offered to explain acceptability of government “fiat” currency (that has no explicit promise to convert to gold or foreign currency) is legal tender laws. Historically, sovereign governments have enacted legislation requiring their currencies to be accepted in domestic payments. Indeed, paper currency issued in Brunei proclaims "wang kertas ini sah diperlakukan dengan nilai"; the US states “this note is legal tender for all debts, public and private”; Canadian notes say “this note is legal tender”; and Australian paper currency reads “This Australian note is legal tender throughout Australia and its territories.” By contrast, the paper currency of the UK simply says “I promise to pay the bearer on demand the sum of five pounds” (in the case of the five pound note). And the Euro paper currency makes no promises and has no legal tender laws requiring its use.

Further, throughout history there are many examples of governments that passed legal tender laws, but still could not create a demand for their currencies - which were not accepted in private payments, and sometimes even rejected in payment to government. (In some cases, the penalty for refusing to accept a king’s coin included the burning of a red hot coin into the forehead of the recalcitrant- indicating that without such extraordinary compulsion, the population refused to accept the sovereign’s currency.) Hence, there are currencies that readily circulate without any legal tender laws (such as the Euro) as well as currencies that were shunned even with legal tender laws. Further, as we know, the US Dollar circulates in a large number of countries in which it is not legal tender (and even in countries where its use is discouraged and perhaps even outlawed by the authorities). We conclude that legal tender laws, alone, cannot explain this.

If “modern money” is mostly not backed by foreign currency, and if it is accepted even without legal tender laws mandating its use, why is it accepted? It seems to be quite a puzzle. The typical answer provided in textbooks is that you will accept your national currency because you know others will accept it. In other words, it is accepted because it is accepted. The typical explanation thus relies on an “infinite regress”: Ahmad accepts it because he thinks Siti will accept it, and she accepts it because she thinks Hua Ho will probably take it. What a thin reed on which to hang monetary theory!

Personally, I’d be embarrassed to write that in my own textbook, or to try to convince a skeptical person that the only thing backing money is the “greater fool” or “hot potato” theory of money: I accept a dollar note because I think I can pass it along to some dupe or dope.

Now, that is certainly true of counterfeit currency: I would take it only on the expectation that I could surreptitiously pass it along.

But I’m certainly not going to try to convince readers of this blog of such a silly theory. Next week: a more convincing argument. See if you can anticipate the answer.

Like a good Mexican soap opera, we need to leave you hanging. I know many readers already know the answer, and you’ve got your hands high in the air, saying “call on me, I know the Butler did it”.

But remember that this is a blog and not all of your classmates know the answer (yet). So, please don’t give away the plot line.

Overcoming Debts

Most people nowadays are saddled with heavy debts and are struggling to make repayments, including Brunei. The move made by MOF on capping on personal loan few years ago and curbing credit card debt last year had been met with a slow down on consumer spending in the country. In effect this had affected the country's GDP's growth. I do not know if this had been anticipated by MOF.

To me, the action taken by MOF had been a double edge sword. On one hand, the country is proactive in limiting and protecting the population from debt but on the other hand, it also slows down the country economic activities.

Now the questions are how do we get the country economy moving again? Should the government "pay" the population debts in order to get the economy humming again?

Printing money to extinguish private sector debt seems like a good plan. However, it doesn't take into consideration that a lot of the debt was incurred to finance non-productive endeavors, such as asset speculation. In other words, this plan would be like printing money without increasing productive capacity. This would likely lead to inflation. It's so much better to print money in exchange for work which leads to productive capacity. Plus, paying people for their debts is unfair. What would that tell people going forward? That it pays to get into debt? And what if people in the future get excessively into debt in order to get ahead, i.e, bid up asset prices while trying to corner assets in the economy. In the end, you'll have people with all the assets and no debt, and then people who never went into debt and don't have any assets. Not fair, and could lead to gross misallocation and crises. 

But then, I see that this scenario causes the newly-printed money to be destroyed (along without the debt), and hence not cause inflation. It also frees private sector from the peachy burden of deleveraging, and get private sector demand moving again. Therefore, I gee that there should be an element of debt write-down in solving the current mess, but there should also be a rule that says people forgiven their debt should not turn around, and use their now increased net equity to again speculate on more assets. after all, with their debt erased, they can now sell their assets and bid up on new assets,(and especially if GDP proponents are listened to, and money is thrown to people to BORROW again. After all, if people don't borrow, how does GDP grow constantly?) If this scenario happens, we'll now have inflation, and we're right back to people with heavy debt.

Bank loans create deposits

Many people find it hard to accept this concept because it defies the basic teachings of mainstream theory, as they learned it in school. 

But take a step back, and look at loans and deposits, and how they come about. You want to borrow money from a bank so you can buy a car from me. Your bank does not have to have the funds to lend you when it funds your loan. All it has to do is go and borrow from the central bank’s deposit window, or otherwise borrow from the interbank market. 

Your bank (which lends you the money) credits your account with the amount. You then take the money, go and buy the car from me, and I deposit the amount in my bank. My bank now has money to lend to your bank, so it can pay off its loan from the central bank.

Same thing if I want to buy a house from you. My bank simply credits me the funds, then I go and pay you with the amount, you deposit it into your bank. My bank now has a loan, and it can borrow the funds it lent me from your bank, which now has additional deposits, which has now circuited from me to you then to them, when my bank lent me the loan.

If no bank lent anyone any money, where would any of us get the additional deposit to put in the bank? And without new deposits, which the mainstream claims funds bank loans, how do banks manage to keep loans growing? This is beyond fractional reserve banking, which as a concept means the bank takes a fraction of its deposits and lends out. If banks were constrained by fractional reserve banking, bank lending growth would have slowed to a crawl (or standstill) long ago.

Banks do not need deposits at all to fund loans. The presence of the central bank discount window which bridges any unfunded loans enables them to simply fund any creditworthy client with the funds, knowing that they will always be able to fund it. All they need is to make sure they charge you higher than their cost to borrow, and that they have the (usually Basel-recommended) capital ratio to back the loan. 

What is true for a two-bank economy is true for an economy that has several banks, many borrowers, and many depositors. Loans have to be made by some bank first before anyone else can get any money to deposit. Neither you nor I are allowed to print counterfeit money just because we want to increase our deposits. We need to borrow it, or sell a good or service to someone who does. Banks do the rest.