DOLLAR CRISIS IN THE MAKING

Please follow to the link , interesting read http://www.atimes.com/atimes/China_Business/KC17Cb02.html

The fallacy of " Economic Growth Engine "

1. In the light of the this economic recession. We start to see that letting the US to be a growth engine for the world economy is a very bad idea. When the engine stops moving, we are not moving anywhere.
   
2. Since the Bretton Woods agreement, the US dollar has been treated as if it was gold itself since it is promised that the US dollar could be redeemed in gold. However the gold standard has been put to death after the some nations started to redeem their dollar reserves with gold, which has caused the US stockpile of gold to decline. Since then the US dollar has been a fiat currency.
3. What gave the US dollar its value is its acceptance as a reserve currency and the use of the US dollar in the international trade. Without this special status, the US dollar is merely just a piece of toilet paper which can be used to wipe your ass.
4. Countries like Russia has already started to question the viability of the US dollar as reserve and its usage in international trade.
   
5. Warping back to the current economic crisis, we have seen that the US government has decided to stimulate its economy by throwing money at the problem. Trillion of dollars has been pledged in attempt to keep their economy alive. Where does this trillion of dollars come from ? They are planning to get all this money by issuing treasury bonds.
6. China has started to question the viability of these treasury bonds and financial instruments. After all these years, China has bought billions of US Treasury Bonds. By buying bonds, they are providing more money for the US to spend on its goods. However, looking into the current economic situation, and the new US protective economic measures. The policy doesn't seems to be in the favor of the Chinese.
7. If the Chinese is buying US treasury bonds, and the US government failed to revive their economy. I believe that the Chinese will stop buying US Treasury Bonds. If this ever occurs, it means that the US government will not be able to generate enough funds to revive their economy. The US government will have to sought to " Quantitative Easing " or in other words, printing money as if it is printing the daily newspapers.
   
8. The result of of quantitative easing is the devaluation of the currency. As the US dollar loses its value, those who holds US dollar will also suffer the losses. How about all those US dollar reserves in most central banks ? I think you can figure it out.
9. We have to take note that, fiat money is not true wealth. The value of the US dollar depends on the economic situation. By printing money, it is evident that the US dollar has lose its credibility as a reserve currency. Even though at the moment, we see that the value of the US dollar is exceptionally high due to mass deleveraging in the world economy. I believe that the US dollar is going to crash down in the long run. When the pledged fund is monetized we will see that the market is flooded with US dollars.
10. I am sure most of us still remembered what happened to the Zimbabwean Dollar. Can you get the picture ?
    

My Opinion on the RM 60B Stimulus Plan

Last week, the government has finally unveiled its RM 60 Billion stimulus plan which is supposed to help to revive the economy by initiating force spending by the government to pick up on slacks by the public. The mini budget presented was for a duration of 2 years which is 2009 and 2010. After gone through some reading in the newspapers, I think that what has been presented was merely a rough estimate of the plan. There is no in depth details on how it is going to spend.

I think it will be too harsh to comment or criticize anything on the stimulus plan since I do not know the specific details on how the stimulus funds will be disbursed. What we should really take note is, the stimulus plan is basically a plan to ease the people's burden in this deteriorating economy since the stimulus plan is not the absolute answer to our economic problem. It is known that, Malaysian export has started to decline, therefore it is important for the government to take measures to provide alternative solutions from the problems which is going to arise soon.

We must consider that government spending will never be able to restore or create demands to match for the demand of our goods before the economic downturn occurs.s. Due to the lower exports, our manufacturing sector will contract and capacity will be cut down to a sustainable levels Therefore plans must be laid to absorb retrenched workers from the affected sector.

The stimulus package must be able to grease the local economy. The velocity of money must be increased so that everyone in the economy will feel the effect of the stimulus. By doing so, the public will no be threatened by unemployment or any adverse affect of the economic downturn.

It does not necessarily means that things will get to normal anytime soon. We all need to spend, but we need to spend below our means and not lavishly. This is important in order to maintain sustainability. Creating a boom in our economy will not solve our economic problem. We need to know that if there is a boom in our economy, the bust will come afterward.

We need to ensure that the wheels of our local economy is well greased .We need to learn from this downturn that demands for our products may shoot up or decline and we must take measures if demand for our product falters.

my hope is :

1. I hope that the stimulus plan will be able to meet it targets.
2. I hope within this 2 years, Malaysia will be able to realign its economy from an export driven economy to a more sustainable type of economy. We could not rely on other people or nations to be an engine of growth. This is what happens when we are too reliant on other people or nations to buy our products.Once the demand falters, we're treading on water. We can see how Singapore is doing at the moment, their economy is contracting. Luckily they're are a very rich country.
   
3. If the global economic situation is not improving, I don't really know what is going to happen. However if we manage to create a sustainable economy based on local demand which is not forced. I think we will have a good chance of surviving this economic downturn.
4. BE PRUDENT !!
   

The New RM 60 B Stimulus Package

I will try to write my views on the new RM 60B Stimulus Package soon

Discussing on the Stimulus Package

The Malaysian Economy

1. As most of us already knew, the economy is all about supply and demand of goods and services. Less demands, the price will fall and vice versa.
2. The next step that we should analyze is where does this demand and our goods comes from. Why is this important ? It is because that by analyzing the source and cause of demand, we can project on the sustainability of the demand. From sustainability, it is possible to make an intelligent assumption to produce certain types of goods or services.
3. Consider this story :

   Once, there was a man who owns a small coffee shop in a village. One day, a fun fair had opened just nearby his coffee shop. Since the opening of the funfair, his business prosper since the visitors of the fun fair would come and visit his coffee shop afterward. Due to strong demand, the owner decided to take a loan to enlarge his small coffee shop and hire more workers to serve his customers. After months passed, people got tired of the funfair and less people are visiting the fair, thus affecting the coffee shop owner business. Soon the fun fair packed up their tents and move to another village. The coffee shop owner was left alone with his recently upgraded coffee shop and extra pair of hands and his dedicated customer.

4. Referring to story above, I would like to say that what is happening to our economy resembles to what the coffee shop owner. We have set up many factories churning out electronic products to cater the needs for people in the US, Europe, Japan and other countries. However as their demand weakened, we are suffering from overcapacity. Some people might argue that the demand was genuine and sustainable. But in my point of view, if those people was purchasing the goods that we produce by using money they did not have aka. credit. How was the demand can be deemed sustainable. All those people we're acquiring goods we have produced through credit. All those unsustainable demand was created due to cheap credit due to low interest rate policies. In the current situation, we could see that interest rate is nearly zero and people are finding it hard to make payment. It means that demand will collapse sooner or later. What I meant was, demand will drop to a natural level at what it was supposed to be and not due to the cheap credit.
5. In the case of the current economic crisis, I think it is evident that the demand created was due to cheap credit.
6. In order to make all our factories back in business, it is important to restore demand. However, in the current situation, I doubt that demand will come back at its "original" level. The Malaysian market is not big enough to consume all those things our factories can churn out.
   
7. Therefore, I think is impossible to restore demand in the short term. What we will see is, demand will fall down to a sustainable level. Thus, layoffs of factory workers and sectors affected will be unavoidable.
8. In my humble opinion is that we should embrace this recession and get back to the drawing board and plan on how we could get all these people back into the job market. We need to create new jobs from sectors unaffected or mildly affected. By doing this, we could ensure that people could stay employed and they will be able to make their loans and mortgage.
   
9. If those people are left without work, it will continue to affect our economy systemically until the economy is halted to a standstill.
   

Where is This Heading

Where is This Heading

1. If we see the newspapers nowadays, we start to see grim news everyday. It has been bad news for the past few weeks. The problem is, it is only now that we have started to see the bad news. The news of the impending global financial meltdown has been circling around for a longer period than that.
2. Shipping industries has started to suffer due to less shipping of Malaysian exported goods or shipping in of foreign imported goods. There will be more layoff in the industry soon and unemployment numbers will begin to rise.
3. Next in line is the manufacturing sector, electrical and electronics to be precise. Electronic products has been a major Malaysian export. 30% of the Malaysian export is consist of electronic products. It is exported to the US, UK, Europe, Japan, China and etc. If the sector is in distress we can see more factories will be shut down and more people will be in an unemployed state.
4. The process will continue on and on and it will affect other sectors as well. All these jobless people due to massive layoffs will be unable to pay their loans and mortgage. Thus increasing NPL's. Banks will start to suffer and we'd better pray that all those bank can stand the stress test. With bad loans in their books and lesser lending, their income will start to deteriorate. More banks will have to restructure, cut more jobs to reduce cost of operations.
5. More commentaries later on hahaha ..............................
   

Economic & Financial Meltdown Imminent

Economic and Financial Meltdown Imminent
Current mood: angsty

Economic and Financial Meltdown Imminent

1. Welcome again to my blog. After a while, I think we can see by now where the economy is basically heading. It's not going up, it's heading south ... as in Slayer's album South Of Heaven... Hahaha .. So what's the big deal ? everyone is suffering right.

Malaysian Exports

2. In the context of Malaysian economy, it is now established that the Malaysian economy has start to feel the pinch of the current economic turmoil. Recently after the Chinese New Year Holidays, we seen reports that factory workers has started being retrenched. The only thing is, we do not know the exact numbers of all these layoffs. By this time, reports on Malaysian exports and imports has been published by the Malaysian Statistics Department and the numbers are not encouraging.

Please visit www.statistics.gov.my to see the numbers

3. It looks like the numbers on our electronic goods exports has declined and we all should take note that electronic goods exports has been our biggest contributor to our exports. Therefore, it means that our income is decreasing. The deterioration of electronic goods exports means that the factories are producing less due to declining demands. This will lead to more layoffs. Once the factories could not sustain their operations, all these factories will have to shut down and lead to more layoffs. More layoffs will increase our unemployment rates. When people are unemployed, they cant feed themselves or their family. It will create restlessness among people and may break into chaos. It will increase crime rates since people are desperate.

4. Other than crime rates soaring, we need to understand that all these factory workers also have debt and mortgage. Once they are out of their jobs, they will not be able to pay their debt and mortgage, thus increasing Non Performing Loans. Basically its a long chain of event.

Mayhem In May

5. In April 2009, Malaysian businesses will start to report their first quarter operating results. If the numbers are grim, it is likely that the stock market will start to plunge more. The horrifying numbers will start to scare people out of the stock market. We will see that layoffs will start to infect to other sectors other than manufacturing. It is likely that it will affect the retail sector. People's earnings are affected and the can not afford to spend much. Therefore those in the retail sector could earn much and after a few months, they too will also have to close causing more layoffs.

Stimulating The Economy

6. At the moment, I do not see how the measures announced by our finance minister will help to stimulate the economy. From what I can see is the stimulus package announced by the government will help a little to mitigate the negative effect of deteriorating world economy by helping certain sectors. However, the stimulus package will not be able to assist every sector in the economy. The stimulus package will definitely help those in the construction line but I do not see if they will benefit the manufacturing sector especially in the electronics.

The Long Run

7. In the long run, I do not think that the stimulus package will be able to mitigate the adverse effects of the current global economic turmoil. I am sure that government spending will be able create new demands. However, there is a limit to what the government can do. The way I see the situation is, if the world economy is not getting any better in 1 or 2 years, we should start to embrace to the fact our condition will deteriorate further. I wonder if the government could afford a stimulus package if the situation continues for another 4-5 years.

Cash Crops and Commodities

8. It is clear by now that we have seen our commodities sector are adversely affected by the global economic downturn. The price of Crude Palm Oil has plunged from RM 3400 per metric ton to RM 1600 per metric ton. Crude Oil prices has plunged from an all time high of USD 148 per barrel to merely less than 30% of the all time high value. Rubber ? they do not stand a chance ....The only commodity which is rising in value in the current situation is precious metals such as Gold and Silver. At the time of writing, it is evident that the price of gold has reached USD 1000 and in my opinion will hovering at the USD 900 - USD 1000 level. I do not know will the current gold prices maintain at this level or fall to lower levels. However, if we see what the world governments are doing, it is likely that the price of gold is going to climb up higher and higher due to the distrust in all fiat currencies. The US government is printing money like mad, most EU countries are flirting or are already in recession. Their banks are basically failing due to their greed in the past years. How about the Malaysian Ringgit ? I do not know yet how it will effect our currency. Therefore I will not comment any.

Diversification My ass

9. All these while fund managers are saying diversify this and diversify that. But at this kind of economic turmoil, I can not see how diversifying is going to help. If you are into stocks and diversifying into different stocks, you are also getting pounded. Whether it is manufacturing, construction, plantation , I see every single sector in stocks got pounded to their knees. This is global recession at a grand scale. Malaysians never experience a recession at this magnitude of severity. The scale of this recession will belittle the one we had in 1997.

Conclusion

10. My conclusion is, embrace for the worse. Stop using debt as a leverage at the moment. Cut credit card spending. Start to save more and stop pamper yourself with luxuries. Try to get your hand on tangible assets, not stocks or bonds. Try gold for a change. In case of inflation arises, gold will help to preserve your wealth.

Last Advice

11. Be prudent at ALL times !

Khairul Bin Mohd Noor

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www.malaysianeconomicfront.blogspot.com