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Saturday, May 28, 2016

How do we get out of the debt trap without printing more money?

The policy options open to major economies, including China, to reduce debt, before another global crisis hits


ALL of us are worried about growing global debt as a precursor to another round of crises. After the last global financial crisis, 2007-2009, global debt rose to more than US$200 trillion or US$27,000 for each person in the world.

Since 2.8 billion or nearly 40% live on US$2 per day, there is no way that the debt can ever be repaid. The bulk of debt owed by governments, banks and companies will be repaid by creating more debt.

If we are happy to create money, we should be happy to create more debt. Right?

Wrong. The right question is not the size of the debt or liability, but where is the net asset? Individually, we can always repay the debt if we spend less than what we earn, or invested in an asset that generates sufficient income to pay the interest.

Collectively, the government can always borrow to repay, because it can always tax to repay, if not principal, at least on the interest. Countries only get into trouble when they owe foreigners and cannot raise enough foreign exchange to repay their debt.


Charles Goodhart, Emeritus Professor at London School of Economics and one of the foremost thinkers on money and banking has written a series of important articles for Morgan Stanley, analysing the current debt crisis.

Emerging markets

The reason we ended up with more debt than ever is due to three factors since 1970 – the willingness of the financial sector to lend, the increase in global savings relative to investment and the demand for safe assets. Professor Goodhart attributed the structural increase in savings to favourable demographics in the last forty years – particularly as emerging markets like China increased their savings from growth in their labour force that engaged in international trade.

The increase in savings relative to investments created a global savings glut, which meant lower real interest rates.

The willingness of emerging markets to park their excess savings in advanced countries in the form of official reserves and the banks willing to extend credit at lower interest rates created the boom in financialisation. Lower interest rates encouraged speculative activity (funded by debt) rather than investments in long-term productive projects.

When the bust occurred, the advanced central banks wanted to avoid a debt implosion and added to the bubble by lowering interest rates and flooded the markets with short-term liquidity.

The quantitative easing (QE) stopped the widening of the crisis, but its initial success enabled politicians to avoid taking tough action in structural reforms. The result was further slower growth from declining productivity, even as companies and governments continued to borrow, affordable only at near zero interest rates. In short, we are in a debt trap – more debt, little growth.




Negative interest rates as a policy tool was invented by small countries like Sweden and Switzerland to discourage large capital inflows that created excessive currency appreciation.

But for the eurozone and Japan to try that would actually destroy their banks’ profitability, which is why bank shares dropped after these were introduced. If banks think they will lose money, they will cut back lending to the real sector further, negating the objective of QE to stimulate growth. Banks receiving QE funds faced the double prospect of being punished for taking credit risks and also the need to increase both capital and liquidity due to the tighter bank regulations.

Helicopter money

Helicopter money is not about central bankers jumping out of helicopters to atone for their mistakes, but about central bank financing a massive increase in fiscal expenditure – truly monetary creation on a large scale. If this happens, watch out for a rise in gold prices.

Prof Goodhart has carefully analysed the three options for deleverging or getting out of the debt trap. The first is to deleverge by swapping debt for equity, being tried by China.

This is feasible when the country is a net lender and both borrowers and lenders are state-owned entities. The second option is to use inflation to reduce the real value of debt. As the recent experience showed, getting inflation even up to target was tough to achieve.

The third option is to address collateral by inducing lenders and borrowers to renegotiate their debt or make the debt permanent. This is both painful and difficult and is unlikely to be adopted unless other options are tried.

In my view, the true result of the Bank of Japan’s negative interest rates is a tax on the older generation, because they are the ones not spending.

Japan tried Keynesian fiscal spending, which failed to sustain growth but created a huge debt overhang.

The Japanese older generation and the corporate sector keeps on saving because they are worried about the future, not surprising given an aging population and sluggish demand for exports.

So if you can’t increase the inflation tax, or corporate taxation to reduce the fiscal debt, use negative interest rates to reduce the value of savings of retirees and the corporate sector. Only Japanese savers would not revolt under such inequity.

For countries that have net savings and large public assets, like China, there is a fourth option to get out of the debt trap, and that is to re-write the national balance sheet. Most foreign analysts who worry about China’s debt overhang forget that after three decades of growth, the Chinese state has also accummulated net assets (net of all liabilities) equivalent to 166% of GDP.

That can be injected as equity into the overleveraged enterprises and banks if and only if the governance and return on assets can be improved under better management.

In the short-run, a clean-up of the over-leveraged enterprise sector and local government debt, embedded in the official and shadow banking system, will help sustain long-run stable growth. How to do this technically will be explained in the next article.

By Tan Sri Andrew Sheng who writes on global affairs from an Asian perspective.

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Friday, May 27, 2016

Free trade in rhetoric, not in practice by Western countries

WESTERN countries commonly proclaim the great benefits of free trade and the evils of protectionism.


In reality, many developed countries practise double standards, insisting on free trade in areas where they are strong, whilst using protectionist measures in sectors where they are weak.

In the worst case, within the same sector they have designed rules that impose liberalisation on developing countries but allow themselves to maintain high protectionism.

An outstanding example is in agriculture, in which the rich counties are not competitive.

If “free trade” were to be practised, a large part of global agricultural trade would be dominated by the more efficient developing countries.

But until today, agricultural trade is dominated instead by the major developed countries.

For many decades they got an exemption for agriculture from trade liberalisation rules.

This exemption ended when the World Trade Organisation (WTO) was crea­ted in 1995 and the rich countries were expected to open their agriculture to global competition.

But in reality, WTO’s agriculture agreement allowed them to have both high tariffs and high subsidies.

The subsidies have enabled far­mers to sell their products at low prices, often below production cost, yet allowed them to get adequate revenues (which include the subsidies) that keep them in business.

This has four negative effects on developing countries.

Firstly, those countries that are agri­­culturally competitive cannot pe­­netrate the rich countries’ markets.

Secondly, the developing countries are deprived of other markets because the United States and Europe can export the same farm products at artificially cheap prices. This is a complaint of African cotton-producing countries.

Thirdly, by exporting a product cheaply, the developed country reduces the demand for a competitor substitute product. If the US did not subsidise its soybean, enabling soybean oil to be cheaper, Malaysian or Indonesian palm oil would have a bigger market.

Fourthly, these cheap products (such as chicken from US and Europe) have entered many deve­loping countries, damaging the livelihoods of their local farmers.

In 2001, the WTO launched a Doha development agenda whose chief goal was to liberalise the agriculture of developed countries.

Much energy was spent over many years to devise methods and formulae to liberalise agricultural trade, and a high degree of consensus was reached.

However, the US, backed by Europe, has now made it clear they do not intend to conclude the Doha Round.

Future WTO negotiations have to be on a new basis, and not based on existing texts.

An article by Chris Horseman in the bulletin Agra Europe (May 12) analysed why the US now cannot accept the existing text.

A reduction in the maximum limit of one type of allowed subsidies (called de minimis) would have pushed the US to increase by 58% another type of disallowed subsidies (known as AMS).

This partly explains “why the US is keen to move away from the formulae on the table and to negotiate a fresh approach,” said the article.

Due to its powerful farm lobbies, the US will not change its domestic policies (embodied in its 2014 Farm Bill) to meet the Doha agenda’s new limits on the allowed amounts of domestic subsidies.

The same article also shows how the European Union has meanwhile changed the types of subsidies it provides, in order to better comply with WTO rules. This also allowed the EU countries to maintain their total domestic subsidies at around €80bil (RM356bil) annually from 2004 to 2013.

Two decades after the WTO was set up, the rich countries have continued the high level of their agricultural protection.

There is little prospect that they will agree to changes in the trading system that will effectively eliminate or reduce the massive subsidies that keep their farming systems afloat.

The poorer countries simply do not have the money to match the subsidies of the rich.

If they want to defend their far­mers and their food security, they can only put up tariffs to levels that keep out the cheap subsidised pro­ducts.

But those developing countries that sign free trade agreements with the US and the EU have to cut their agriculture tariffs to zero or very low levels.

At the same time, at the insistence of developed countries, agricultural subsidies are kept off the FTA agenda. Thus, the rich countries can keep their subsidies and swamp developing countries with their farm products.

The US and EU are also taking protectionist measures in other areas against developing countries.

For example, the US successfully filed a case against India at the WTO, that the latter’s National Solar Mission favours local firms through its domestic content requirements for solar cells and modules.

This kind of objection makes it extra difficult for India or other developing countries to take action against climate change.

The European Parliament recently voted to refuse giving China the status of a market economy in the WTO, although WTO members are obliged to recognise China as a market economy by December 2016, 15 years after it joined the WTO in 2001.

By denying China this status, it is easier for other countries to suc­­­­­­c­e­ed when taking anti-dumping cases against China, and thus to place extra tariffs on Chinese exports.

China and India are fighting back.

India last week announced it will file 16 cases against the US for violating WTO rules when providing subsidies under its renewable energy programmes.

China won a case against the US in the WTO for wrongly imposing countervailing duties against 15 Chinese products including solar panels, steel sinks and thermal paper.

However, the US has not complied with the panel decision to withdraw the duties, and China is now starting action at the WTO to get the US to comply.

It seems impossible to prevent or reduce the rich countries’ high protection of their agriculture. And it also seems they will continue using protectionist measures against products or policies of developing countries.

There is indeed a big gap between the rhetoric and practice of free trade.

By Martin Khor Global trends

Martin Khor (director@ southcentre.org) is executive director of the South Centre. The views expressed here are entirely his own.

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Thursday, May 26, 2016

Landed residential properties much sought after with resilent demand, Market insights

CBRE|WTW managing director Foo Gee Jen (pic) said that in spite of confidence issues among property buyers, there was still good demand for “the right products,” especially for landed units.

PETALING JAYA: Demand for landed residential units is still promising despite the current property glut, said an official from a local real estate services provider.

CBRE|WTW managing director Foo Gee Jen (pic) said that in spite of confidence issues among property buyers, there was still good demand for “the right products,” especially for landed units.

“Despite the issue with the confidence levels, some developers are still registering good sales for landed and affordable homes. High rise developers meanwhile are having to offer a lot more freebies, with some even offering their own financing.

“But you don’t see that for landed property as the demand is still there,” he said at a press conference announcing the joint venture (JV) between real estate agencies CH Williams Talhar & Wong Sdn Bhd (WTW) and CBRE last week.

He emphasised that one of the biggest issues facing the current property sector is not oversupply, but instead a mismatch of supply and demand.

“Developers are putting the wrong products in the market and this is not what the masses want. The demand is there but it’s not the correct product. So the question is, how long will the market take to absorb (these products)?”

As an example of a mismatch between demand and supply, Foo cited low-cost housing in areas that were not accessible to the proper target audience.

“For instance, there are low-cost properties built in Bukit Beruntung. But the daily toll and fuel cost of travelling to Kuala Lumpur for work is heavy for the type of people living in such homes.

“Also, there are so many high-end shoebox units now and Malaysia is unlike Singapore or Hong Kong. We still have plenty of land. If you’re putting the right property in the right location - you’ll still see a long queue of people attending the launches.” CBRE, the world’s largest commercial real estate services firm and a Fortune 500 company, announced yesterday that it had acquired a significant interest in Malaysia’s largest real estate service provider, WTW, WTW Real Estate Sdn Bhd and WTW Property Services Sdn Bhd.

The business will rebrand as CBRE|WTW effective immediately, with WTW holding a 51% stake in the JV. WTW network of 13 offices in Peninsula Malaysia.

CBRE Asia Pacific chief executive officer Steve Swerdlow said the collaboration was consistent with the firm’s strategy to grow in South-East Asia.

“At a time when planning is underway to link Malaysia and Singapore via high speed rail and with the Asean Economic Community and the Trans Pacific Partnership facilitating greater collaboration for both countries and their wider partner countries, this offers many opportunities for cross border activities when they arise.”

With CBRE as a strategic partner, Foo said the firm can now help its clients expand their activities beyond Malaysia, providing them with more options through a diverse means of expertise. “Conversely we can be a party to help bring greater meaningful inbound investments into the Malaysian market via the CBRE global network.”

By Eugene Mahalingam The Star

Top Story -market insights
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