Tuesday, January 27, 2009

State of the Economy.......

Our wise man first said that we were in a Golden Period. Then when the crisis struck, he said that in Feb 2008 Asia won't be badly hit as China and India continue to grow. Yesterday his latest forecast for the economy is that we are in a recession that may last 2-3 years . A few iterations and he might have gotten it right. He did slowly go from Golden Period optimism to the recession pessimism....

"The first and most important thrust in the Resilience Package is jobs for Singaporeans. We will introduce a Jobs Credit scheme to help employers to keep their workers. We will also strengthen our subsidies for training and provide additional support for lower-income workers who face a reduction in pay during the downturn. Finally, the Government will also expand recruitment across ministries and statutory boards, for all levels of employees, and including mid-career professionals" - Singapore Budget 2009 Statement.

There are things we already know have happened and will happen. There has been a demand collapse and job losses will come. Just scanning through public announcements of companies, you can tell there will be massive job losses. Even Microsoft is retrenching - can you imagine that? Microsoft is not short of cash, it is not short of innovative ideas for expanding its business yet the fall in demand is so bad it will retrench thousands of employees around the world for the 1st time since Bill Gates started the company decades ago. The newspapers keep drilling home the message that the job credit will save jobs. It may save some jobs but it is also giving money to many companies that don't need it. For example, the SMRT declared record profits again....giving them cash is not going to encourage them to hire another driver for each train. No doubt the job credit will have a positive impact on the economy but it is not going to come close to solving the joblessness problem. The govt can create jobs by recruiting more people to its ministries. It is good thing but I wonder how our ministries can recruit more people than it already has or needs ...I guess for defense and security related, the headcount is elastic you can argue that a policeman is needed for every void deck. In fact I was thinking since the govt is so allegic to giving handouts to the jobless, the other way is to put almost every jobless person on its payroll. You get a handout, you're on the govt's payroll and you do something - look for Mat Selamat in Ubin, search for him in MacRitchie....stand at the SMRT station to scan for potential terrorists...or better still sign on to serve in the Navy, Police etc. Judging from those outlandish, surrealistic Navy ads, I think the Navy probably have the hardest time looking for people. Now they can stop making me watch those ridiculous ads because they should be able to recruit people easily:


I'm sure the guy who came up with those ads can find a job in Hollywood easily...if not MediaCorp should hire him.

Going through the analysis from various economists a much clearer picture has emerged on what is going on and some consensus is emerging on what the solution should be:

1. The global economy is in a recession with a high risk of going into a deflationary spiral (falling prices, falling investments, job losses --> lower prices, more job losses).

2. There is a fear that the global economy will go into what Japan did in the 90s (known as the Lost Decade) or the US during the Great Depression.

3. There are 2 schools of thought - the monetarists view and minority Austrian School on what to do next.

4. Bernanke & gang belongs to the monetarist camp believe that these events were caused by the monetary contraction. The approach is to shore up money supply.

5. The Austrian School economists believe that all the bad things we are seeing are caused by credit expansion and the inevitable collapse of this expansion. Their belief is the Fed caused all these problems by interfering with the money supply. The Great Depression was caused by money supply expansion in the 1920s and the current crisis is caused by Greenspan. Their suggestion is to do nothing and take the pain..and get rid of the Fed and stop interfering with the money supply. You see supporters such as Marc Faber (aka Dr. Doom) and Jim Rogers who asked for his govt to allow all the banks to collapse.

Since the Austrian guys are saying doing nothing which is easy but awfully painful, if you want to do something it has to be to shore up the money supply with the monetarist approach. For govts that want to do something, the tips from Lost Decade & Great Depression are:

1. Do what you need to do early. The same measures are less effective if you spread it out. The PIMCO experts say that the global economy just had a heart attack - you want to shock it back to life with a defibillator now. Doing it later is useless because the economy would be dead, you can't revive a dead man.

2. Do not be afraid of doing too much. You can tackle the side effects of doing too much later.

3. Don't do things reactively like the Japanese did.

4. Do everything you can. Shore up the banks. Slash interest rates. Govt spending. Tax cuts. Spare no effort.

The window of time is small and the effort required is huge. The American people gave Obama the mandate to get these big things done fast and he has gone about doing it. However, there are limits to what is politically acceptable and possible. Obama is now pushing a $850B stimulus to be implemented fast. However, based on a number of models, the size of package required to revive the US economy is closer to $2T. $2T is politically impossible to get done....economics being an inexact science the argument can always be made by politicians for doing less. Because of politics, he probably has to split the stimulus doing $860B first.. making it less effective. Doing things slower will mean doing more. As the US economy weakens, the banks' balance sheet will deteriorate further and they will need to do more to shore up the banks some estimate $1T is needed here. Without political will, US will just descend into a firefighting state like the Japanese - you enter a trap a vicious cycle and you just can't get out. This one can be a long one just like what MM Lee said yesterday but a lot depends on what Obama can get done. He seems to understand what is needed but he is hindered by political opponents who operate on ideology or just don't want to see him succeed.

14 comments:

Anonymous said...

The fool had no idea what he was talking about when he claimed we were in a Golden Age.

Likewise, he has no idea what he is talking about now, when he gives a timeline for us to get out of this recession.

Anonymous said...

i actually felt sympathetic after reading this frank piece of writing. lol.

i agree there is a limit to artificial job creation by the gov.though it maybe a good idea to keep these people "occupied"(there may not be useful work - end up shaking legs or doing something irrelevent) in times like this(especially graduates) but whose money are they dispensing to pay these people? if you dilute these monies, will other social and economic strategic interests suffer?again, this exercise could just be shifting the problem somewhere else.

job credit? nah. your conscience will tell you it's not right and to go against your sacred instinct is purgatory.

"There are 2 schools of thought - the monetarists view and minority Austrian School on what to do next.4. Bernanke & gang belongs to the monetarist camp believe that these events were caused by the monetary contraction. The approach is to shore up money supply.5. The Austrian School economists believe that all the bad things we are seeing is caused by credit expansion and the inevitable collapse of this expansion.Their suggestion is to do nothing and take the pain..and get rid of the Fed and stop interfering with the money supply. "

to pump up the money is again, a temporary solution.the build up of money will eventually create another financial bubble and are we to repeat the same prescription? furthermore, i suspect consumption patterns have changed. an economy that builds on unpredictable consumption is asking for trouble,

the austrian schoolof thought is closer to a conscientious solution however, it is not without disastrous results.


the only option you have not considered is perhaps, solution from a higher perspective?

let's watch the development and see what happens next.

Anonymous said...

Mr MM Lee is just like our Mr Wong Kan Seng.

You flip-flop. First, Mas Selamat is in Singapore and dangerous, then he is not. WTF?!

Perhaps they should measure bonus and ministerial salary by how long you can disappear from your job leaving shit to the people (as per Mr Tan Yong Seng). The longer MM Lee takes to predict the world movement, the more accurate it is and we should pay billions to him.

Onlooker said...

Hmmm some of these are really good advices but I wonder if the monkey people on top will implement them.
Actually Skill training is one key issue they got correct.
But last I heard they are still importing Security guards leh. Why huh? any one?
What about SIA. Last time heard through the grapevine they are going to start retrenching crew(ie SPG air assam. PS quality drop liao) and cutting intl air flights.

Anonymous said...

"He seems to understand what is needed but he is hindered by political opponents who operate on ideology or just don't want to see him succeed." - Lucky Tan on Obama

Haha! That's where Obama needs to learn from MM Lee. You know, MM Lee where got political opponents who hinder him. He just sued their pants off.

Anonymous said...

The fool had no idea what he was talking about when he claimed we were in a Golden Age.

Likewise, he has no idea what he is talking about now, when he gives a timeline for us to get out of this recession.



Anyone who follows current affairs (locally and overseas) and pays some attention to economics news & analysis by pundits, will know that LKY is simply repeating what others have already said first. The only original thing from him is "Golden Period", and this was when there were already ample warning signs about.

Anonymous said...

Hi, the assumption that "the economy just had a heart attack, that immediate action is needed, and that future action is useless because the economy is already dead" is a very dangerous assumption to be had in the formulation of ANY model regarding the current economic situation. This assumption basically rules out SEVERAL possibilities before they were even considered, and would provide the support for rackless actions that would lead to even greater economic catastrophe down the road. You may like to check out nakedcapitalism.com if you had not read Yves Smith's posts previously.

Yours sincerely,

Truth, Integrity, Compassion

Anonymous said...

I am worried when the leaders start to talk about "shaping character" in our young with their pockets or mouth full of dollars.

blessed are the poor doesn't mean no flushing system in your toilet. blessed are the poor means the absence of the rich to screw things up for everyone.

Ghost said...

To be fair, he's not the only one to change from Golden Period optimism to the 2-3 recession pessimism. I can think of at least 20-30 world leaders who are in the same boat.

Anonymous said...

But I think our leaders take the cake for the sheer number of economic and investment mistakes. They bailed out banks which the Americans themselves do not wish to bail out. =)

Anonymous said...

What is the difference between other politicians and our politicians. Besides the salary.

Others politicians apologise and resign for they mistakes. Our politicians either blame or forgive the people for their mistakes and tell the population how lucky they are to have such incredible leaders

Anonymous said...

Maybe the salary is the reason why our politicians will never resign on their own accord for screwing up.

For most developed countries, people become politicians because they want to serve. Politics could also be a stepping stone to something else, like being a paid public speaker. But that's after politics. Not during.

In Singapore, politics and public service has evolved into a career. A multi-million career. Which is why they will hang on for dear life onto their jobs even if they screwed up big time.

Anyway, our public servants are not really "servants". If your perm sec or minister can earn 20 times more than you do, he is more like your master than your servant.

Anonymous said...

DR DOOM is Nouriel Roubini not that sit on your ass salaryman aka marc faber. please get your facts right!!!!!

Witch said...

to be fair, i think if one's performance is in line with the other 20 or 30 people, then one should get the same remuneration as them...