When Turkey Vote For Thanksgiving

Most governments (except for 17 Euro countries) can create unlimited amount of their sovereign money. Yet most of us choose to ignore this fact. Some of us even fret on that notion. However, the hard truth is that government spending is not a burden. It is a gift of a monetarily sovereign nation, the most brilliant form of government financing ever created.

That said, there is something insidious, essentially invisible, that happens when government spending is reduced or stagnated. The absence of benefits sneaks up on us, like the butterfly killer that leaves no clue, until one day there are no butterflies. You never will know how your life and country’s future will be affected by reduce or stagnate government spending say on education. What child genius will not grow to invent the cancer cure or the unlimited, pollution-free fuel or the food that does not require farming? How many great scientists and artists and builders will not be created? We never will know.

The list goes on and on: The lame who might have walked. The blind who might have seen. The children who might have given to their country. The inventions never invented. The life-saving drugs that might have been developed. The people who might not have died too soon. The beauty never created. The ideas lost. The better world that might have been. We never will know. 

And we trade all this potential for the reality of a meaner, uglier, less elegant life, especially for the lower classes, who will be affected most by reduce or stagnate spending, though we all will be affected. What a waste, given the tools we’ve been given, that we intentionally should deprive ourselves and our children and our grandchildren of the benefits a society can offer, and instead retreat toward the days of hardscrabble anarchy. 

What have we lost? What will we lose tomorrow? We never will know. But one thing we know - the turkey is voting for thanksgiving.

Royal Brunei Airlines Saga

Few days ago, RBA announced staffs layoff as part of its "stabilization" plan. Further reading can be found on the following link - http://brudirect.com/index.php/Local-News/laid-off-staff-lament-rba-restructuring.html

To me RBA had forgotten its true purpose. If we were to look into the history, RBA was created and tasked by the government to build connectivity and enhance economic activity for the country by the provision of high-quality, competitively priced flights to destinations in Southeast Asia and around the globe. As time goes by we forgot about it. Instead we are increasingly diverging from the narrow private profit interests of the company. Thus, RBA is now embarking a policy of returning to its roots which involves a series route suspensions and staffs layoff. This race to the bottom and cost-cutting mentality is leading the low-price airlines to trial stand-up “seats” and other service-diminishing angles. It is hardly the outcome we want for our national carrier.

My view is that our government should fully "nationalize" RBA and recreate its role as the iconic national carrier operating to maximize Brunei interest. Because every time a state-owned airline sells a ticket we must realize that the “revenue” it generates will be much larger than the difference between the ticket price and the cost of providing that seat. Every tourist RBA bringing in would be spending in a range of small and other businesses and generating employment throughout the economy. 

I sincerely believes that if RBA is fully "nationalize" then it would have an incentive to provide high quality attractive services. And importantly continue to offer the population secure and well-paid jobs and it would be truly a national icon - working to serve us all.

Exporting for Prosperity....huh?! - Redux

It is clear to me that every country in this world are jumping onto the export bandwagon mentality. We have the US, UK, BRIC, ASEAN, South Asians, Japan, Koreans, Australian, and many more are all jostling for a piece of the export pie. 

Now, we have the EU countries joining the export foray. On December 8, 2011 during an ECB press conference, President of ECB, Mario Draghi said that “if you enhance the competitiveness, you can actually count on your external demand, on your net exports”. Mr Draghi is telling that ECB now wants export driven growth for the whole Europe!

Now, let me asked you this. If every Tom, Dick and Harry wanted to export then who will be the buyer? Martians? According to recent world economic report, countries that have export driven policy are currently experiencing a slowdown in manufacturing activities i.e. reduce external demands. China latest PMI of 47~49 indicate a slowdown in factory orders. India, Singapore, Germany, South Korea, Malaysia, Brazil and many more, are all reporting a slowdown in new orders. Do you see the problem?!

How can the world economy continues to grow if everybody is selling? To me, there must be a at least an equal number of sellers and buyers. Without it, all the talks about exporting to prosperity is just meaningless.

IMF - The Great Con Artist

Yesterday, IMF released its latest review on Greece. It was called “Greece: Fifth Review Under the Stand-By Arrangement, Rephasing and Request for Waivers of Nonobservance of Performance Criteria; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Greece”. It is quite a mouthful title, isn't it?! To me, the title of the review says “We are bullies, we got it wrong, we need to twist the screws even tighter”. Why the negativity? I tell you why.

The latest IMF medium-term forecasts for Greece reveal a staggering failure by that institution to understand causality and the impacts that their austerity programs have on real economies. Since the first review on Greece was released in September 14, 2010, IMF continue to get their forecast wrong, every time! The sad thing is that they will not admit to it and continue to preach fiscal tightening (fiscal austerity). And the Greeks economy continue to go from bad to worse. The Greek economy has already declined by 15 per cent and the projected cutbacks in the government net spending will be of the order of 25 per cent. An economy cannot grow in those circumstances especially when its trading partners are also in decline (for the same reason).

IMF track record had not been very impressive after all this year especially to low income countries. For over 40 years, IMF had been subjecting low income countries to so called IMF Structural Adjustment Packages (SAPs) and the result had been disastrous, to say at least. The SAPs entered the scene in the late 1970s with the debt crisis that engulfed the world. This was constructed as a crisis for the developing nations but it was really a crisis for the first-world banks. The IMF made sure the poorest nations continued to transfer resources to the richest under these SAPs.

The overwhelming evidence is that these programs increase poverty and hardship rather than the other way around. The following graph comes from the World Development Indicators, provided by the World Bank. It shows Gross National Income per capita, which, in material terms is an indicator of increasing welfare.

There are many mechanisms through which the SAPs have increased poverty. 

1. Fiscal austerity is almost always targeted at cutting welfare services to the poor – which often means health and education (the IMF claims that educational and health cuts no longer happen). But moreover, the cuts prevent sovereign governments from building public infrastructure and directly creating public employment.

2. Public assets are typically privatised. Foreign investors often benefit signicantly by taking ownership of the valuable resources.

3. Contractionary monetary policy forces interest rates up which often discriminate against women who survive running small businesses.

4. Export-led growth strategies transform rural sectors which traditionally provided enough food for subsistance consumption. Smaller land holdings are concentrated into larger cash crop plantations or farms aimed at penetrating foreign markets. When international markets are over-supplied, the IMF then steps in with further loans. But the original fabric of the land use is lost and food poverty increases.

5. User pays regimes are typically imposed which increases costs of health care, education, power, and in some notable cases, reticulated clean water. Many of the poorest cohorts are prevented from using resources once user pays is introduced.

6. Trade liberalisation involves reductions in tariffs and capital controls. Often the elimination of protection reduces employment levels in exporting industries. Further, in some parts of the world child labour becomes exploited so as to remain “competitive”.

In essence, IMF is an organization that do much harm than good. My only wish is that people will realize this soon rather than later.

What is the alternative to export?

The other day a reader asked me what is the alternative to export? Well, in economics, it is better to receive than to give. Therefore, as taught in 1st year economics classes:

Imports are real benefits. Exports are real costs.

In other words, going to work to produce real goods and services to export for someone else to consume does you no economic good at all, unless you 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 for itself, plus all it imports, minus what it must export.

Consider the following. Quite recently, our country bought 3 new offshore patrol boats - KDB Darussalam, KDB Darulaman and KDB Darulehsan from a German company, Lurseen Werft. Now if we look at the transaction, we, Brunei raised millions of Euros and wired it to Germany. In return, Lurseen Werft sweated it out for 3 years in building the vessels for Brunei. With the new vessels, our country are now better protected.

Does it take much effort for Brunei to raised the needed Euro? Honestly, I do not know. However, had our government understood what it meant to be a monetarily sovereign in the first place, I doubt it was a difficult endeavor. All our country needs was to create the necessary Brunei dollar and exchange them for the necessary Euro. Just like us going over to Miri or Limbang where we exchange our Brunei dollars for Malaysian ringgits. Does it require much effort? I don't think so.

But some of you might say, if we import so much, there shall be huge unemployment in our country. To me, our country can ALWAYS support domestic output and sustain domestic full employment with fiscal policy (tax cuts and/or govt. spending), even when Germany, or any other nation, decides to send us real goods and services that displace our industries previously doing that work. All we have to do is keep Bruneian spending power high enough to be able to buy BOTH what foreigners want to sell us AND all the goods and services that we can produce ourselves at full employment levels. Yes, jobs may be lost in one or more industries. But with the right fiscal policy, there will always be sufficient domestic spending power to be able to employ those willing and able to work, producing other goods and services for our private and public consumption.

A trade deficit, in fact, increases our real standard of living. How can it be any other way? So, the higher the trade deficit the better. The mainstream economists, politicians, and media all have the trade issue completely backwards. Sad but true.

D'OH!

Today's post is rather long. Here is an example to help you think about all of this economic jargon. The concepts are simple and the numbers are small which makes it easy to understand and relate to. 

Imagine the economy is my household which is comprised of me (the parent) and you (the kid)! As the parent I assume the role of “government” and you thus comprise the non-government (private) sector. As the government I decree that I will offer 100 of my business cards per week, if you agree to tend the garden on a weekly basis. These are the cards I exchange at meetings with business associates outside of the household. They are normal size rectangles of cardboard.

You say, naturally, “Why would I want your worthless business cards?”

I reply, “because to stay living in the house I expect 100 business cards a week to be paid in taxes”.

You say, “when do I start work!”

Immediately, by imposing tax obligations in the currency of issue (the business cards) I have created a demand for the currency and this allows me to transfer private resources (your work in the garden) to the public sector (the nice garden). However, also note that I have to spend the 100 cards each week before you can pay the tax of 100 cards – which clearly means that the taxation can never be considered a source of revenue which “finances” or allows me to spend the cards in the first place. The cards come from no-where and I have the monopoly rights to spend them. I am never financially constrained in my own business cards (the currency).

So this sort of currency is what we call a fiat currency – being made legal by legislative fiat. It has no intrinsic worth and its value is tax driven. Just like the Brunei dollar!

Note that I probably would never “print” any cards. I would run some spreadsheet on the house computer and just keep “bank entries” to record all the outflows (spending) and inflows (taxation). All the transactions would just be numbers entered into relevant columns. If I slipped up and added a 0 to my spending one week, I wouldn’t have to “print” 900 new cards. You would be better off by 900 cards because it would show up as a deposit in your account. But nothing else would be required. Same as in our country economy.

Now under these conditions, the household budget would be balanced each week: I spend 100 cards and you pay 100 cards. You are unable to accumulate any cards (that is, save) because you can only get access to the volume of cards that I make available via spending. Same as in our country economy.

What if I wanted to teach you to save as preparation for managing your own affairs when you became an adult? Well the only way you can save is if I, for example, decided to employ you more each week and offered, say, 120 cards per week as wages (government spending) yet continued to tax you only 100 cards. The same effect could have been if I reduced the tax rate and held spending constant or a combination of increasing spending and reducing taxes.

Whatever, and lets stick to the spending of 120 and the tax of 100, the budget now goes into deficit of 20 cards per week. You now can save 20 cards per week because my spending (the government spending) has provided the “finance” to permit you to do that. As the weeks go by you could accumulate more and more savings (numbers in the spreadsheet would increase) and you would soon see that the non-government saving over time is the exact record of the cumulative deficits being run by me (the government). Same as in our economy.

Now, you might want to make more money (cards) on your savings. The only way that can happen is if I offer you a government bond or sukuk (a bit of paper saying that if you deposit your savings with me each week I will pay them back at some future time plus some interest all in business cards). So the offer of a new financial asset – the household debt instrument (the bit of paper) gives you a chance to compound your saving and maybe take a holiday – not work some weeks but still pay taxes!

So the debt issuance in the household establishes a non-zero rate of interest in the household and increases your wealth. I didn’t have to issue the bond/sukuk to keep running the deficits. The bond/sukuk just replaced non-interest bearing savings (reserves in our “banking” system) with an interest-earning asset (the bond/sukuk). Same as in our country economy.

Now lets say I am reading some neo-liberal literature on the Internet which warns me against running budget deficits. As a result I get the feeling we have to get back into budget surplus to be a responsible government. So I tax 100 cards but cut my spending on garden work to, say 90 cards per week.

Can you predict what will happen now? Well in that particular week there are not enough cards “spent” to generate the funds necessary for you to pay the tax. There are 10 cards short. The household (government) budget is in surplus for that week to the tune of 10 cards. But this shortage of cards liquidity in the private sector (that is, you!) means that you will:

a. Demand more work to earn the shortfall – noting that the household has now reduced employment levels (in hours) and there is some underemployment creeping in. If I made the example more complicated with 2 or 3 kids in the house I could have easily cut spending by not paying anything to one or more of the kids thus creating unemployment.

b. Try to sell some of your possessions to get some cards. In this simple case, you will offer your bonds/sukuks (the bits of paper) for sale to get the funds. So the surplus starts to eat away at your wealth portfolio. I would be boasting like a neo-liberal would that I was running down the government debt – “getting the debt monkey off the government’s back” – which may help me sleep better – but you would just be feeling less well off (and maybe developing insomnia!).

c. Start to run down any savings that are not being stored in bonds/sukuks. Either way you run down your wealth holdings.

But in aggregate, the budget surplus is squeezing your card liquidity and forcing you to run down wealth. Same as in our country economy.

If I kept running budget surpluses, you would eventually run out of assets and your labor would be severely underutilized  You might be able to persuade me to start lending you the money (I might set up a privatized bank in the household) and this would keep you afloat (paying the taxes) as long as you were prepared to accept increasing private debt levels. But this is not a sustainable option. Same as in our country economy.

And finally, Homer said,....

Time To Ponder...

I had been keeping track on the current economic crisis. What I had found out is quite unsettling. Majority of the current economic pundits such as ECB, IMF, World Bank and mainstream media are advocating on cutting government spending and increase taxation as a sure way for recovery. Well, I have problem with that line of thinking. My problem is this ~ 

HOW DOES A TAX INCREASE OR SPENDING DECREASE REDUCE UNEMPLOYMENT OR GROW THE ECONOMY?

Can you see the logic? In my line of thinking, to grow an economy, you need growing supply of money. And  also, a nation can not tax itself into prosperity.

I just only hope that people shall come to their senses soon. If not we shall be seeing the rise of fascism, nationalism and perhaps Nazism. When that happen, I would not be surprise if World War 3 becomes a reality.   

May god save us all!

Trade Surplus...Are They Beneficial?

With current world economic malaise, most countries are trying very hard to run a trade surplus. The thinking behind this so called logic is that more money will flow into that particular country economy. With more money coming in, the affected countries hope to "wiggle" themselves out from the current doldrums. But do trade surplus really brings in the anticipated benefits?

Brunei creates the goods/services such as oil and gas, others want and export them overseas in exchange for other people money. The oil and gas are scarce to Brunei. Time, manpower and physical resources are necessary for their creation. By contrast, dollar, yen, won, pound and etc are not scarce to the US, Japan, Korea, UK and etc. Those governments have the unlimited power and authority to produce their monies, without using any resources, whatsoever. The press of a computer key sends billions of dollars, yens, wons, pounds from those governments to anywhere.

A trade surplus is an example of one country devoting great effort to creating scarce materials for another country in exchange for something that requires no effort by the other country. In that sense, Brunei is becoming a servant to others. We work, sweat and strain and use our valuable resources to create and ship to others the things (oil and gas) they want, while they, hardly lifting a finger, ship their monies to us. Who has the better deal?

Obviously, for any given individual, the situation is different. None of us has the unlimited ability to create Brunei dollar. We have to work hard for our Brunei dollar. Brunei dollars are scarce to each of us. But when we talk about trade deficits, we are talking about governments, and there the situation changes. Dollars, Yens, Wons, Pounds are not scarce to the US, Japan, Korea, UK government respectively.

To satisfy our "trading partners", we dig and ship every drop of oil and gas in our country; we burn all our oil and gas; we employ every man and woman in harsh conditions; we empty our country of all physical resources, and still they would have plenty of dollars, yens, wons, pounds to send to us, simply by touching a computer key.

This may be more easily understood by looking at China, with whom US have a huge trade deficit. One day, China will have sent the US every yard of cloth or every ounce of their steel, leaving their country a hollow, empty resource depleted, while the US blithely will go on producing dollars. Who has the better deal?

Of course, as monetarily sovereign nation, China is able to create as much of their own money as they wish. They do not need to work so hard to send their precious resources to the US in exchange for the dollars. Just like our country, we are also monetarily sovereign and able to create our own Brunei dollar as much as we wish.

Cry For Help?

Quite recently Brunei Times ran a story about the pitiful family life of 14 at Sungai Batong. Full story can be read at the following:

http://www.bt.com.bn/news-national/2011/11/28/emotional-tale-familys-fight-survival

The story lead me to wonder just how many more families in our country are in the same predicament! Not having enough money, children not attending school, saddle with huge debts and so forth. With new electric tariff coming online as of January 1, 2012, I left to ponder what would be the outcome? In any case, it seems that the things that I had put up on this blog are coming true. 

Well, is there a solution to all this? To me it is obvious - Our government needs to understand what it meant to be monetarily sovereign. Understanding those term shall alleviate much of the population woos. 

Printing Gazillion Brunei Dollar...But

I believe that by now some of you might be thinking that the things I had put up are pure crazy. There is no way in the whole wide world that you can print an endless amount of money without any consequences. Honestly, you are right.

However, as it is now, under current fiat currency system, Government CAN print any amount of money. Yup, any government in this world can print an endless amount of money. One trillion, no problem. 100 gazillion, no problem. Make every citizens in this world a trillionaire, no problem. But, yes, there is a but to it!

We can print an obscene amount of money PROVIDED there are real goods and services to buy. That's right, you need something to buy with your money. If there are no real goods or services available to buy or procure, then printing gazillion of Brunei dollar shall be a pointless endevour. Brunei dollar shall lose its value and inflation sets in.

As I had mentioned in my early post, printing more money never lead to inflation or hyperinflation. It is the loss or non availability of real goods or services that money can buy, leads to the uncontrollable inflation. That is why I advocate that our government should create or print or key ins few more millions of Brunei dollar in order to build Temburong bridge.

Temburong bridge is a real good and service. It is physical and provide an endless amount of benefits to the country. Thus, there is no need for the government to seek private money. And furthermore, those private money is the same money that our government created in the first place. There is nothing special about private money.

Temburong Bridge

I was quite please with today's announcement in Brunei Times about the near completion of Temburong bridge feasibility study. After all these years, we are now one step closer in closing the gap and linking all the 4 districts. Further reading can be found at the following link:

http://www.bt.com.bn/news-national/2011/12/02/temburong-bridge-study-nearly-done

However at the end of the article, it is quite disheartening to learn that our country is still looking for various options to fund the multi-million project. This was revealed by Ministry of Development's Permanent Secretary, Hj Suhaimi bin Hj Gafar. I gasped in amazement how ignorance of us in our government financial capabilities. Since when government spending is revenue constrained. Didn't he realized that our government had the ability and mean to build the Temburong bridge without resorting to private scheme?!

Brunei Darussalam is a monetarily sovereign nation. She create her Brunei dollar without the need of oil and gas money. Brunei had this ability since August 15, 1971 after the collapse of Bretton Woods System. Brunei will never runs out of Brunei dollar. Nowadays, money does not require to be printed into existence. With just a few keystrokes on the computer keyboard, Brunei can "create" hundred of millions worth of Brunei dollars, sufficient enough to build the Temburong bridge.

Only wish people will understand and not being blinded with the notion of government being revenue constrained in its ability to spend.