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.