Middle class want more cheer

Malaysia's Tax Budget 2011

ON THE BEAT WITH WONG CHUN WAI

Middle income group hopes spillover effects, especially from tourism and construction sectors, could help.

LET’S face it – many of us expected more from Budget 2011 than what has been delivered. Probably because of wishful thinking, the result of inaccurate media speculation and the belief that it would be a pre-election budget, we expected, or more precisely we hoped for, better tax reliefs in individual income taxes.

But that didn’t happen, so many of us in the middle income group are frowning.

Most of us who work and live in the city eat out a lot. Living in the Klang Valley, we work late, so eating in restaurants is a necessity rather than an option.

The increase in service tax won’t be welcomed. Having to pay more to the govern­ment for my Astro isn’t amusing either, especially when the free-to-air TV stations have not lived up to our expectations.

Sure, we grumble a lot over Astro’s repeats and most of us have had enough of monster fishes and reptiles. But we still need the satellite station for our weekend football matches.

Luckily, the urban middle class who also enjoy going to drinking spots in Bangsar have been spared another round of hikes on excise duty for beers and stouts. It is already the second most expensive in the world after Norway.

The setting up of the National Wage Consultation Council with representation from all stakeholders is important. We can’t talk about wanting to be a high income nation when there is no minimum wage in Malaysia. Certainly the council will be entrusted with making recommendations on minimum wage as well as other measures.

Many in lower and middle management are caught in situations where they are not entitled to overtime claims because they are not in the unionised category but they have heavier responsibilities and work longer hours than their subordinates.

In many cases, this group of middle class executives and managers end up earning less than those working below them.

However, many Malaysians would be happy to hear that they will get a 50% stamp duty exemption on instruments of transfers for buying houses worth less than RM350,000 if they are first-time buyers.

Still, many city folks will be hard-pressed to look for homes within this range. In Kuala Lumpur and Petaling Jaya, many link houses are priced at over RM1mil; semi-detached homes are more than RM2mil; and apartments are priced from RM400,000 to over RM2mil.

There’s some small comfort, though. The abolition of import duties on 300 items is welcomed. It’s not just for handbags and lingerie, as the list includes cotton T-shirts and even Christmas decorations.

So, let’s give credit when credit is due. After hotel bills, shopping is the second highest spending item for tourists so it is a big deal for the tourism sector, which is the country’s second revenue earner after manufacturing. In 2007, Malaysians and tourists spent RM67bil on shopping.

It has been reported that Malaysians have RM200bil as savings in the bank. Spending, or consumption as the economists prefer to call it, is essential to make the economy move.

In the United States, Australia and parts of Europe, there are factory outlets where one can buy branded items. There is none in Malaysia. It is our biggest disadvantage because tourists like to buy branded items at good discounted prices in a central area.

In the absence of such a facility, the removal of duties on these 300 items, especially branded goods, would help boost the tourism sector. There will be spillover effects because promoters who work in shopping outlets would benefit from bigger sales. So, it is inaccurate to suggest that the men in the street would not benefit. From hoteliers to taxi drivers and restaurant owners, tourism is helping them in a big way.

The Petronas Twin Towers, which have become a tourist attraction, will be dwarfed by the proposed 100-storey building under the Wawasan Merdeka mega project.

Like the KLCC, which was developed on an expensive piece of land once used for horse racing, the proposed tower will also be built on prime land that is currently idle.

The 88-storey Twin Towers project was heavily criticised when it was first mooted by Tun Dr Mahathir Mohamad.

Judging from the comments in blogs and Twitter, the proposed tower must be the most unpopular item from the Budget.

Many Malaysians have expressed doubt over the viability of the project and fear that the tall building would have occupancy problems as there is already a glut of office space in KL. Others are asking how this mega project would benefit Malaysians.

These are genuine concerns and obviously Permodalan National Bhd will need to explain its plans for the building. At 100 storeys, it will be one level short of the 101 Taiwan. The tallest building in the world, Burj Khalifa in Dubai, has 108 storeys.

So, if the Wawasan Merdeka building isn’t going to be a world beater, what are we going to achieve with this mega project?

Being prime land, we surely do not expect PNB to put up a 10-storey building there, so it will be good for them to share the benefits of the project to enable Malaysians to appreciate it better.

Hopefully, its construction would have multiplier effects, bringing in economic benefits for other sectors

We hope the project is part of an integrated push for KL to take the next leap forward. No one would argue with the need for the Mass Rail Transit (MRT), which will make travelling in the city much easier. No decent capital city in the world can do without it.

The push to make KL a financial centre under the RM26bil KL International Financial District plan would help strengthen our position as a reputable international Islamic banking. Talk is that Jalan Imbi has been identified for the project. The property market in KL will surely be the beneficiary if this takes off.

From a middle class perspective, the hope is that there will be spillover effects from this slew of projects which will be taken up by the private sector with input from the government. When buildings are put up, the construction sector will be the main beneficiary.

See the related earlier post::
 A painless, facilitative budget

Policies made to measure

For the ultra-rich, there’s the luxury of tailor-made insurance plans

By LORNA TAN

SINGAPORE: Very wealthy people, not surprisingly perhaps, are in the market for insurance policies that pay out mega sums.

But until fairly recently, the market in Singapore was so limited that these people often had to go abroad to arrange such policies.

Times are changing as this high-end market grows larger. Insurers here, eager to tap into the burgeoning very wealthy population, have launched ‘jumbo’ or ‘universal’ policies to cater to their needs. These plans provide very large death benefits, above S$653,000 (RM1.5mil) and as much as S$25mil (RM60mil) or even more per policy.

Some plans, such as the AIA Platinum Legacy policies, actually have no upper limit on the sum assured and these jumbo cases will be assessed on a case-by-case basis.

Needless to say, you need to have deep pockets to buy a universal plan. But high net worth individuals (HNWIs), to use the industry jargon for these very well-heeled types, also enjoy the flexibility of deciding the amount and frequency of additional premiums after paying the minimum initial premium, subject to certain conditions.

For example, Prudential’s PruUniversal Vantage’s premium is paid on a lump sum basis.

Prior to 2005, such high-end products were available only through offshore providers, and clients were flown to Hong Kong for underwriting. In 2005, United States insurer Transamerica Occidental Life Insurance Company set up an office here.

As the market for such plans took shape, more insurers have jumped on the bandwagon. Said Walter De Oude, chief executive of HSBC Insurance (Singapore): “Given the rising affluence in Asia, there is certainly a demand for solutions to help HNWIs protect and distribute their wealth.

“Our high net worth business for HSBC Jade Select Universal has more than doubled in the past year,” he said.

HSBC Jade Select Universal was launched early last year and is the only one in the region that has a multi-currency option and multiple tenures for interest rate guarantees, he added.

Currently, there are seven insurers offering universal life products. Of the seven, three –Canadian insurer Manulife, local insurer Great Eastern and British insurer Prudential Assurance – launched their universal plans this year.

Universal life plans are a variant of traditional whole life and endowment plans, where policies accumulate a cash value. But there are several factors that distinguish them from plain vanilla policies.

For instance, the premiums and death benefits of universal plans are flexible. The period of coverage can also be altered to meet desired financial goals from the policy’s cash value accumulation.

This differs from a traditional life plan that serves to provide specifically a death benefit (whole life plan) or a maturity benefit (endowment plan) and does not offer such flexibility, said Tang Yin Fong, wealth management firm Providend’s risk management senior specialist.

Universal life plans also differ from traditional products, whose cash value is dependent on the investment performance of the insurer’s life fund. Instead, the cash values of universal life products are dependent on so-called ‘interest-crediting rates’ declared by the firm. Most of these plans come with a minimum guaranteed interest rate.

For instance, for AIA Platinum Legacy plans, the crediting rates for the plans vary but there is a minimum guaranteed rate of three per cent, said Paul Hughes, chief marketing officer at AIA Singapore.

The downside to such policies is that the death benefit or sum assured may not be guaranteed. This means that the policy could lapse if the crediting interest rate falls to its bare minimum. The premium may be insufficient to cover the monthly deduction for charges, such as mortality costs, if the policyholder fails to top it up.

To prevent this from happening, some insurers offer a no-lapse guarantee benefit, which guarantees cover even if the cash value of the universal life plan drops to zero, subject to certain conditions.

Patrick Lim, associate director at financial advice firm PromiseLand Independent, also cautioned policyholders to note that the policy may lapse if the minimum premium requirement is not met, subject to certain conditions.

The commissions for such policies are quite substantial, usually 10% of the single premium.

Plans for estate planning

Financial experts say that universal life plans are most appropriate for estate planning. This includes accommodating the wishes of the well-heeled to preserve their wealth so as to leave behind a meaningful legacy for future generations or charities.

Said Albert Lam, investment director at IPP Financial Advisers: “One key advantage is that a universal life policy is not an off-the-shelf product. It can be tailor-made to suit the needs of customers.”

He gave the example of a grandparent, aged 60, who purchased a universal life policy for S$400,000 (RM900,000) on the life of his son, aged 30. The sum assured was S$2mil (RM4.7mil) and it was meant to provide protection to his grandchild upon the death of his parent.

If the parent did not pass away, the policy provides the flexibility of paying out a pre-agreed percentage of the premium on an annual basis when the grandchild reaches 18 or 21 years of age for the next decade or so. This can be used to fund the grandchild’s university education or supplement his salary in the initial years of employment.

Other uses of universal life plans include retirement planning, where one’s wealth may be enhanced through the plan’s benefits. Such plans are also used as collateral for banking facilities, and to fund business succession planning where key personnel are insured.

Given the huge premiums required to kick-start a universal life plan and to keep it in force, the target market for such products is primarily the mass affluent and HNWIs.

“These people would be looking for a life policy that is more flexible and has the potential to accumulate larger cash benefits,” said Lim. It appears that such products are more suitable for older investors, who are around 50 or older.

Super-rich come to S'pore

Insight Down South
By Seah Chiang Nee

Many of working class living in the heartland do not see much benefit from having so many rich people around – but they feel the pain of rising costs.

"Asia's growing wealth is slowly making its way into Singapore. Most Europeans, too, are parking their money here"

A LUXURIOUS 7,072 sq ft penthouse at a prime district has just changed hands for S$30mil (RM71.46mil) in one of the most expensive deals on a per square foot basis. The buyer was a permanent resident from Hong Kong and the seller an Indian tycoon who had bought it in 2006 for S$17.3mil (RM41.21mil).

The cost of the triplex with five bedrooms and an 11m swimming pool worked out to S$4,242 per sq ft, a record in land-scarce Singapore.

Last June, an unknown Chinese national snapped up a bungalow on Sentosa Island for S$36mil (RM85.77mil), the highest paid for a residence here. The PR holder from China had considered the price a bargain, according to the agent who handled the sale.

These are among a rising number of wealthy foreigners – especially Chi­nese, Indians and Indonesians – who have made this city their family residence while doing business outside.

Asia’s growing wealth, particularly from China and India, is slowly making its way into Singapore. More Europeans, too, are parking their money here.

For a glimpse of a Singapore in, say, another 10 or 15 years, just take a picture of Monaca or Zurich and superimpose it on this island. What will emerge is a city of wealth – transient and abiding, a land of personal banking, celebrity-chef dinners, where Bentleys, Lamborghinis and Ferraris ply the street and branded goods will become daily items.

An example of the foreign presence can be gauged at Sentosa Cove, one of Singapore’s most posh and expensive waterfront projects.

More than 3,000 people now live there. They have come from 22 countries, the top five nationalities being Singaporeans (who make up 40%), Australians, Britons, Germans and Chinese.

“Singapore has opened up a lot in recent years and we’re drawing foreigners keen to park their money as well as live here,” a developer said.

The arrival of the nouveau riche has created new fortunes for Sing­apore’s upper middle class, but it has also widened the economic gap between the rich and the poor as few of the lower class derives much benefit from the phenomenon.

For the upper class, the story is clear. Last year the number of millionaires jumped by 26%. Currently, 11.8% of Singaporean households have at least US$1mil (RM3.09mil) in investible assets (excluding property) each.
Some recent headlines gave an indication of the change, good and bad.

A Singaporean billionaire, Peter Lim, has just made a US$507mil (RM1.56bil) bid to buy England’s Liverpool football team. And two Singaporeans displayed their wealth less gloriously at the casino tables. One, a company managing director of a seafood business, lost S$26mil (RM61.95mil) in just three days, while the second, who was in the latest Forbes list of Singapore’s 40 richest people, dropped S$100mil (RM238.27mil). Easy come, easy go!

Cashing in on it, Citibank last week launched an exclusive Ultima credit card for the super rich in Singapore where members must have S$5mil (RM11.9mil) and admitted only by invitation.

Some of the nouveau riche came because of their children’s education. Among them is action star Jet Li, who bought a bungalow for S$19.8mil (RM47.15mil) last year. He took up citizenship and sent daughter, Jane to study here.

Another new settler, US investment guru Jim Rogers, with a net worth of US$1.8bil (RM5.55bil), also came to send his daughter to the reputable Nanyang Primary School two years ago.

To ensure she got a better chance, Rogers and his wife had performed 40 hours of volunteer work, something the locals do.

Who are the richest foreigners living here?

The Forbes’ list of top 40 ranks China-born Zhong Sheng Jian, 48, as the fourth richest man in Singapore with a net worth of US$2.5bil (RM7.71bil). And 47 year-old Indian-born Sudhir Gupta, now a naturalised citizen is ranked 13th richest. He has a personal fortune estimated at US$320mil (RM987.3mil).

Seventeen percent of foreign buyers of high-end property in the first quarter are Chinese, and the number is rising. One out of five bought houses in prestigious multi-million dollar districts of 9 to 11, the Central Business District (CBD) and Sentosa.

Some salesmen have reported cases of Chinese buyers paying the down payment with a bag of cash, leading to suspicion they may be keen to cover the money trail.

Recently a growing number of foreigners have turned to buying landed properties.

Under the law foreigners, including PRs, cannot buy any property on land or any apartment with fewer than five storeys – except with special approval. Under its strategy of attracting the wealthy and talented to settle here, the government appears to be loosening the screw.

In the first half of this year, 150 such sales were allowed, most in the prime, rich areas.

Local critics are protesting against such sale of precious landed properties. “It is like selling the country’s Crown Jewels to outsiders,” one blogger wrote.

The influx of foreign wealth is not welcomed by all Singaporeans. Some see their cake becoming smaller and more expensive.

Many of working class citizens living in the heartland do not see much benefit from having so many rich people around – but they feel the pain of rising costs.

A polytechnic student asked: “And what happens to us when they suddenly take their money and go home?”

Leadership, Why, how, what? How To Innovate Like Steve Jobs?

Why, how, what?

Inside-out leadership the difference between winners and losers

SCIENCE OF BUILDING LEADERS BY ROSHAN THIRAN

“People don’t buy what you do, they buy why you do it. And what you do serves as the proof of what you believe.” – Simon Sinek

Simon Sinek: How great leaders inspire action   19 min ted.com

A COUPLE of years ago, I was perplexed by an issue: Why are some people and organisations more innovative, more influential, and more profitable than others, even though they may be less funded, less equipped, and possibly far inferior? Why do some command greater loyalty from customers and employees alike?

Everywhere, small start-ups’ were outwitting big giants, and little “people” like Nelson Mandela, Mahatma Gandhi and Sam Walton were out-muscling far more advanced and illustrious opponents.

Why is Apple considered more innovative than Samsung, even though Samsung wins more innovation awards?

Mozilla is a small foundation with less than 60 employees but their Firefox products is far superior to mighty Microsoft’s Internet Explorer; Microsoft has more resources, talent and funding.

Last week, I interviewed Wikipedia founder Jimmy Wales on the Leaderonomics Show. Wikipedia has one employee yet eliminated heavy-weights Encyclopaedia Britannia and Microsoft’s Encarta to become the world’s largest encyclopaedia.

This question kept bugging me until I met Simon Sinek via a TED Talk, who similarly grappled with this issue.
He studied the lives of Martin Luther King, and the Wright brothers, who did not have as much funding or expertise as Samuel Langley in the aviation wars, yet won against the odds.

Sinek found that successful people think and act completely opposite from the others who ended up “losing”. He used three words – why, how and what – in a concept he named “the golden circle”.

The outermost circle, labelled “what” represents, for example, a company’s product. The next circle, “how”, would be the technology behind this product, and the innermost circle represents “why” the company makes the product.

With successful individuals, everything started with “why” followed by “how” and finally “what”. Sinek discovered that the “losers” communicate in the exact opposite manner.

He adds: “Any organisation can explain what it does; some can explain how they do it; but very few can clearly articulate why.”

Success can easily be replicated if we all start practicing “inside-out” instead of “outside-in” leadership.

The why-how-what model is actually grounded in biology. Our brain is split into the neo-cortex and the limbic brain. The neo-cortex (how and what) is responsible for all our rational, analytical thought and language.

Our limbic brain (why) is responsible for feelings, trust and all human behaviour and decision making with no capacity for language.

When we communicate from the inside-out, we are speaking directly to the parts of the human brain that control behaviour.

The neo-cortex will then follow, rationalising that behaviour. When we communicate from the outside-in, people may understand vast amounts of complicated information, but may not trigger behaviour.

This is why you can give someone all the benefits of your product but they still don’t buy your products, while in some cases (as with Apple’s iPhone 4 with receptor problems), people would still flock to the product.

Why

Steve Jobs once said: “Innovation has nothing to do with how many research and development (R&D) dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It’s not about money. It’s about how you’re led.” Jobs understood clearly how to lead and it meant starting with the “why”.

The crux of Sinek’s idea lies within this centre “why” circle. The “why” represents an entrepreneur’s beliefs and passion. Why does your organisation exist? This is probably the most important strategic question your business needs to answer yet most people answer this question with “making money”.

Making money is necessary for survival but cannot be your sole purpose; we all need good health to live but that doesn’t make good health the purpose of living.

Your “why” should be enduring, and involve a social contribution and be worthy – bringing a sense of purpose.

Here are some examples – Google (let’s organise the world’s information), Mozilla (let’s kill Microsoft), Apple (let’s reinvent the status quo), Wikipedia (let’s all contribute knowledge and create a true depository of global information), AirAsia (enabling everyone to fly) and Leaderonomics (let’s transform the nation).

Neurologist Aron Buchman claims people who understand their “why” in life, actually live longer and have lower risk of Alzheimer’s. He adds: “People with high purpose in life have a lower risk of dying and developing disability. We found that people with high purpose in life at the beginning of the study had a two-and-half times lower risk of developing dementia.”

Knowing your “why” gives you direction. You tend to have more opportunities than you could possibly pursue. Knowing why you exist helps you decide what you will do and what you will intentionally choose not to do.

How

After your “why” is formulated, you can then figure out “how” it is going to accomplish the “why”. Take Walmart, the world’s largest retailer.

It started with a simple “why” – everyday low prices. Sam Walton wanted to create a store where customers didn’t need to cut coupons, compare prices or engage in non-value added activities to obtain the lowest price.

Then, he went about the “how”. Walton built an entire infrastructure to support his “why”, including the world’s best supply chain, an EDI system that ensured cost efficiency, hiring of “lower cost” retired folks, establishing stores in remote locations where rental was lower, completely cutting out advertising and keeping his corporate team as lean as possible.

Most organisations benchmark Walmart and try to “copy” their “how”. However, the “how” at Walmart has its foundation on its “why”, thus making copying immaterial.

AirAsia’s “why” was to ensure “everybody can fly”. Their “how” was to build an entire infrastructure to support this “why”.

To enable everyone to fly, they needed to manage costs and price tickets from zero (for those with no money) to full price (for those who can afford to pay). If their “why” was to be the “best low-cost airline”, all their tickets would be priced low.

Essentially, the “how” are ways the “why” gets accomplished – your value system, processes and structures, infrastructure, the talent in your organisation and the eco-system you create to support your “why”.

Wikipedia’s “why” enabled them to build an entire web eco-system (how) with a global volunteer and policing organisation.

What

Amazon.com is a business that defies logic – an online retailer that has become the biggest bookstore in the world. Jeff Bezos, its CEO and founder, knew his “what” – to open an online book store. But unlike others, he didn’t start with “what”.

He spent countless hours in traditional brick-and-mortar bookstores trying to figure out “why”. As Bezos visited bookstores, he realised there was an “experience” people went through buying books. People read parts of the books, compared books, browsed the best-seller lists and got frustrated when a book they wanted was out of stock.

Bezos quickly understood his “why” – to become “earth’s biggest bookstore.” He later refined his “why” to “We seek to offer earth’s biggest selection and to be earth’s most customer centric company.”

His “how” was to ensure the “experience” in a traditional bookstore was replicated while the frustrations (ie. lack of book titles) was addressed.

This infrastructure that he built costs millions but guaranteed Amazon provided a truly unique customer experience (his “why”).

Finally, after this entire infrastructure was built, he focused on the “what” – the actual products and services that Amazon offered – books, music and videos. The “what” may have started out as a bookstore, but once he understood his “why”, it progressed into much more.

Likewise, Apple started out as a computer company, but their “why” was to make a dent in the universe. Apple believed that “everything we do, we do differently”.

They believed in challenging the status quo. That was their “why”. And “how” they challenged the status quo was by hiring talented people and making beautiful products with great designs.

And finally, “what” Apple does is make computers, MP3 players, phones or anything that supports their “why”. We often communicate starting from the “what”. Companies communicate “what” they’re selling. But the truth is, people don’t buy what you do. They buy why you do it.

Final thoughts

There is a difference between giving direction and giving directions. Direction is the end destination (your “why”) to which you are headed, while directions (your “how” and “what”) is the plan to get you there. Leaders often give directions when they should be setting direction.

Martin Luther King inspired many to make a difference on racism. Interestingly, his speech began with “I have a dream” and not “I have a plan”.

We think a great business begins with a solid business plan. But numerous businesses built on solid business plans don’t last either. Instead, start with “why” and you may just end up inspiring millions.

>Roshan Thiran is CEO of Leaderonomics, a social enterprise passionate about transforming the nation through leadership development. To sign up your kids for leadership camps this school holidays, email
yasir.osman@leaderonomics.com, or login to
www.leaderonomics.com.

How To Innovate Like Steve Jobs ?

By KYM MCNICHOLAS

Image via CrunchBase

What does Steve Jobs do, that none of us seem to be able to emulate? 
Carmine Gallo has been following Steve Jobs for more than a decade.

He watches all of Steve Jobs’ presentations. He’s talked to analysts, former employees and other experts to find out what makes Jobs not only the best communicator in the world, but also the best innovator.

He has a new book on the market called, “The Innovation Secrets of  Steve Jobs.”

The book is #1 on Amazon’s Kindle in three categories:  creativity; leadership; and office skills. 

There’s a chapter in the book called, “Kick-Start Your Brain.” In it, Gallo explains that what scientists have found is that great innovators practice what’s called “association”. They look outside their industry for ideas they can apply within their organization. Steve Jobs has been doing that his whole life.

Here are two examples:

1) Gallo says Jobs’ inspiration for not having a designated cashier in the Apple Store,  came from the Four Seasons hotel chain, which has a concierge;

2) When Jobs and Steve Wozniak were creating the Apple 2 computer,  which became one of best selling personal computers of its time, Jobs wanted a computer people would have in their homes.  But instead of looking at his competitors, he walked through the kitchen appliance isle at Macy’s for inspiration.

In that same chapter, scientists explain to Gallo that another key to kick-starting your brain and get those creative juices flowing is to try new and novel experiences that push you outside your comfort zone and push your interests.

Take a look at the video below. In it, Gallo shares one BIG key to Jobs’ success:  “Sell Dreams, Not Products.”

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Monkeying with interest rates: US, Japan and EU monetary policy

Monkeying with interest rates

THINK ASIAN BY ANDREW SHENG

EVERY Chinese child knows the old story about monkeys who were offered a choice of two bananas in the morning and three in the afternoon, versus three in the morning and two in the afternoon.

Most monkeys chose the latter, but the traditional answer was that there should be no difference because both choices end up with five bananas. Who is right?

Actually, the monkeys are right. Three bananas in the morning are better than two in the morning, because there is a time preference of consumption now versus consumption later.

The two choices are not the same because there is a value attached to time, which is the interest rate.

The interest rate is the price to compensate for delayed consumption, because in the afternoon the monkey risks not getting the third banana, so it prefers to consume one more in the morning.

The two choices are identical when the interest rate is zero, because there is no reward for consuming now or later.

This is exactly the dilemma the world faces under quantitative easing, which is another word for printing money.

There are two reasons why advanced countries may want interest rates to be near zero.

The first is that after a crisis, zero interest rates mean that the central banks do not fear higher inflation.

The second is that zero interest rates subsidise the borrower, especially since the advanced economies are all highly in debt.

But zero interest rates have huge distortive effects on resource allocation.

If the advanced countries are growing at 2%-3% per annum, the real interest rate should be around 2%-3% per annum, because the savers should be compensated for the growth in the economy, otherwise their capital is being eroded in value.

With interest rates at zero, markets also have difficulty pricing risks.

The gross interest rate or dividend should always price in an element of risk that the borrower may default or inflation may rise.

By printing too much money and keeping interest rates very low, central bankers in advanced economies are hoping to reflate their economies.

Japan has tried this for decades without any success.

Actually, my diagnosis of the Japanese debt deflation is that there are two mutually reinforcing reasons of demographics of an aging population and lower income from low interest rates.

As the population ages, the economy must slow. Lowering interest rates causes the aging population to save more, rather than consume, because their income from their savings is declining.

This creates a vicious circle. In the short run, the low interest rates create a bond bubble (since the price of the bond is the inverse of the bond yield).

When the government runs higher and higher fiscal deficits, it can only do so by lower and lower interest rates.

This is exactly what has happened in Japan, when the domestic fiscal debt has reached 200% of gross domestic product (GDP) and if interest rates rise to global levels, the government would have an impossible fiscal crisis and the bond market would implode.

Europe and the US are running large fiscal deficits with fiscal debt averaging 100% of GDP and rising.
Central bankers are a conservative breed – they seldom talk bluntly.

However, the president of the Federal Reserve Bank of Kansas, who hosts an annual exclusive Jackson Hole Economic Symposium in August for central bankers, recently gave a brave speech called “Hard Choices”.

You know you are considered a respected central banker when you are invited to the Annual Jackson Hole conference. Needless to say, I have never been invited there.

The first hard choice is regulatory. President Hoenig considered that the “too big to fail” problem will not go away easily.

He said, “The Basel Committee just announced an agreement to establish for our largest global banks a Tier 1 capital-to-asset ratio of 3%. This is a 33-to-1 leverage ratio.

Bear Stearns entered this crisis and failed with a 34-to-1 leverage ratio. It leaves a small cushion for error and is a level of risk that I judge unacceptable.” Thank you for telling the truth, President Hoenig.

The second hard choice is monetary. Paul Krugman warned that “deflation is a serious risk and that the US could become another Japan, which must be avoided at all costs”.

President Hoenig dissects that hard choice: “But as much as I want short-term improvement, I am mindful of possible longer-term consequences of zero interest rates and further easing actions. Rather than improve economic outcomes, I worry that the FOMC is inadvertently adding to “uncertainty” by taking such actions.”

He correctly diagnosed that “the financial collapse followed years of too-low interest rates, too-high leverage, and too-lax financial supervision as prescribed by deregulation from both Democratic and Republican administrations.

In judging how we approach this recovery, it seems to me that we need to be careful not to repeat those policy patterns that followed the recessions of 1990-91 and 2001.

If we again leave rates too low, too long out of our uneasiness over the strength of the recovery and our intense desire to avoid recession at all costs, we are risking a repeat of past errors and the consequences they bring.”

He advocates “dropping the ‘extended period’ language from the FOMC’s statement and removing its guarantee of low rates. This tells the market that it must again accept risks and lend if it wishes to earn a return.”

In other words, he favours easing off “quantitative easing” by getting the market back to normal.
“A zero policy rate during a crisis is understandable, but a zero rate after a year of recovery gives legitimacy to questions about the sustainability of the recovery and adds to uncertainty.”

I congratulate President Hoenig for his frank and realistic assessment of the current dilemma of excessive low interest rates.

Unfortunately, I am not sure that his central banking guests may want to follow his advice. A great pity if they don’t.


>Tan Sri Andrew Sheng is adjunct professor at Universiti Malaya, Kuala Lumpur, and Tsinghua University, Beijing. He has served in key positions at Bank Negara, the Hong Kong Monetary Authority and the Hong Kong Securities and Futures Commission, and is currently a member of Malaysia’s National Economic Advisory Council. He is the author of the book “From Asian to Global Financial Crisis”.

US, Japan and EU monetary policy: Monkeying with interest rates

September 22nd, 2010

Author: Andrew Sheng, University of Malaya and Tsinghua University

Every Chinese child knows the old story about monkeys who were offered a choice of two bananas in the morning and three in the afternoon, versus three in the morning and two in the afternoon. Most monkeys chose the latter, but the traditional answer was that there should be no difference because both choices end up with five bananas. Who is right?

Actually, the monkeys are right. Three bananas in the morning are better than two in the morning because there is a preference for consumption now versus consumption later. There is a value attached to time, which is represented by the interest rate. The two choices are identical when the interest rate is zero, because there is no reward for consuming now or later.

This is exactly the dilemma the world faces under quantitative easing, which is another word for printing money.

There are two reasons why advanced countries may want interest rates to be near zero. The first is that after a crisis, zero interest rates imply that central banks do not fear higher inflation. The second is that zero interest rates subsidise the borrower, which is especially pertinent nowadays when advanced economies are all highly in debt.

But zero interest rates have huge distortive effects on resource allocation. If advanced countries are growing at 2-3 per cent per annum, the real interest rate should be around 2-3 per cent because savers should be compensated for the growth in the economy, otherwise their capital is being eroded in value.

With interest rates at zero, markets also have difficulty pricing risks. The gross interest rate or dividend should always price in an element of risk that the borrower may default or inflation may rise.

So why support a zero interest rate policy?

By printing too much money and keeping interest rates very low, central bankers in advanced economies are hoping to reflate their economies. Japan has tried this for decades without any success.

Keeping with the Japanese example, the demographics of an aging population and lower income from low interest rates are two mutually reinforcing reasons for Japanese debt deflation. As the population ages, the economy must slow. Lowering interest rates causes the aging population to save more, rather than consume, because their income from their savings is declining. This creates a vicious circle. In the short run, low interest rates create a bond bubble (since the price of a bond is the inverse of the bond yield). When the government runs higher and higher fiscal deficits, it can only do so by lower and lower interest rates.

This is exactly what is happening in Japan. If interest rates rise to global levels, the government would have an impossible fiscal crisis and the bond market would implode. Europe and the US are also in danger of the same outcome – the US and some European countries are running large fiscal deficits averaging 100 per cent of GDP and rising.

Central bankers and policy makers need to talk bluntly about this worrying problem. Luckily, Thomas Hoenig, president of the Federal Reserve Bank of Kansas, who hosts an annual exclusive Jackson Hole Economic Symposium in August for central bankers, recently gave a brave speech called ‘Hard Choices.’

The first hard choice he discussed is regulatory. President Hoenig considered that the ‘too big to fail’ problem will not go away easily. ‘The Basel Committee just announced an agreement to establish for our largest global banks a Tier 1 capital-to-asset ratio of three per cent. This is a 33-to-1 leverage ratio. Bear Stearns entered this crisis and failed with a 34-to-1 leverage ratio. It leaves a small cushion for error and is a level of risk that I judge unacceptable.’

In addition to improved regulatory practices, the second hard choice is monetary. President Hoenig succinctly dissected this policy dilema. ‘[A]s much as I want short-term improvement, I am mindful of possible
longer-term consequences of zero interest rates and further easing actions. Rather than improve economic outcomes, I worry that the FOMC is inadvertently adding to “uncertainty” by taking such actions.’

He correctly diagnosed that ‘the financial collapse followed years of too-low interest rates, too-high leverage, and too-lax financial supervision as prescribed by deregulation from both Democratic and Republican administrations. In judging how we approach this recovery, it seems to me that we need to be careful not to repeat those policy patterns that followed the recessions of 1990-91 and 2001. If we again leave rates too low, too long out of our uneasiness over the strength of the recovery and our intense desire to avoid recession at all costs, we are risking a repeat of past errors and the consequences they bring.’

He advocates ‘dropping the “extended period” language from the FOMC’s statement and removing its guarantee of low rates. This tells the market that it must again accept risks and lend if it wishes to earn a return.’ In other words, he favours easing off quantitative easing by getting the market back to normal. ‘A zero policy rate during a crisis is understandable, but a zero rate after a year of recovery gives legitimacy to questions about the sustainability of the recovery and adds to uncertainty.’

I congratulate President Hoenig for his frank and realistic assessment of the current dilemma of excessive low interest rates. Unfortunately, I am not sure that his central banking guests may want to follow his advice. It would be a great pity if they didn’t.

Andrew Sheng is Adjunct Professor at the University of Malaya and Tsinghua University, Beijing.

A painless, facilitative budget

A QUESTION OF BUSINESS BY P.GUNASEGARAM

Najib has packaged a smattering of goodies while paving the path for growth with a sprinkling of incentives and expenditure.

IT’S a budget which is rather difficult to juggle with coming at a time when the world economic scenario is again uncertain as growth already shows definite signs of slowing in the second half.

The stimulus packages can’t be cut back quickly or the economy might slow even more. However, there is still the prudent need to ensure that the overall budget deficit – the excess of development and operational expenditure over total revenue – does not become too unmanageable.

That is reflected in only a marginal decline in the budget deficit to 5.4% of gross domestic product (GDP – goods and services produced within the country) for 2011 from 5.6% this year. The real cuts have to be postponed.

In the meantime, such spending is not sustainable especially in the face of what may be a slowing in government revenue as a result of a smaller growth in the economy. That means in 2011, the private sector has to firmly take over the reins of growth.

For that to happen, it is vital for confidence to be maintained and for the Government to do all it can to facilitate both private investment as well as consumption.

In a sense then, the budget announced yesterday by Prime Minister and Finance Minister Datuk Seri Najib Tun Razak is facilitative – it lays the groundwork for sustained economic activity in the face of renewed adversity on the external front by encouraging private investment and consumption.

Thus, it is that Najib put emphasis on a slew of projects announced earlier, most of which are to be undertaken largely by the private sector with some impetus provided by government agencies. On that will depend much of the push for economic growth.

There is realisation too that Malaysians do have a lot of money in the banks with savings of over RM200bil. The cut on a range of imported consumption goods no doubt indicates a desire to tap this savings pool to fuel demand in addition to making Malaysia a shopping haven for tourists as well.

An interesting aside was the politically charged issue of toll rates and their increase. Najib stands to increase his and the Barisan Nasional’s popularity by announcing that there will be no toll increase for the next five years.

Reportedly the government investment company Khazanah Nasional, and the Employees Provident Fund are launching a general offer for PLUS, the north-south highway operator, for over RM20bil. As part of the deal and the subsequent restructuring of equity and debt, the public will get some toll relief.

The call for the establishment of a minimum wage has been deftly deferred by the establishment of the National Wages Council with representation from all stakeholders. The council will come up with a recommendation on minimum wages as well as other measures related to wages.

The attempt to give some to the small man was reflected in the move to increase wages of security guards in government services so that they will earn more than RM1,000 a month in wages and fixed allowances.

While earlier measures by Bank Negara to curb property speculation was reflected in higher down-payments, the Government has encouraged first time buyers by coming up with a scheme whereby the 10% down-payment will be guaranteed by Cagamas, the national mortgage corporation.

Finally, it must have come as some relief to those who enjoy the occasional tipple or two (sometimes more) to know that alcohol has been left well alone. On that note, here’s to the budget!

> Managing editor P. Gunasegaram is convinced it is false to argue that less expensive alcohol and tourism go hand-in-hand – look at Singapore! But he isn’t complaining.

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Middle class want more cheer

"Politicization" of Nobel Peace Prize

SCO voices opposition to "politicization" of Nobel Peace Prize

Muratbek Sansyzbayevich Imanaliev, Secretary-General of the Shanghai Cooperation Organization (SCO), voiced his opposition to the politicization of the Nobel Peace Prize here Friday, saying the award should not be used as a tool to interfere in other country's internal affairs.

Imanaliev said the Peace Prize should be awarded in accordance with the testament of Alfred Nobel.

Nobel's testament says the prize should be conferred on the person or persons who "have done the most or the best work for fraternity between nations, for the abolition or reduction of standing armies and for the holding and promotion of peace congresses."

"It is very regrettable that the Prize was awarded to a criminal who is now in prison," Imanaliev said in an interview with Xinhua.

Imanaliev also expressed his hope "concerned parties" can faithfully adhere to Nobel's will and prevent such an award from being politicized.

The Norwegian Nobel Committee awarded the 2010 Nobel Peace Prize to Liu Xiaobo on Oct. 8th in Oslo, Norway.

Liu was sentenced to 11 years in jail on Dec. 25, 2009 after a local court in Beijing convicted him of agitation aimed at subverting the government.

The Chinese Foreign Ministry on Tuesday blasted the award for showing "no respect for China's judicial system" and questioned the "true intentions" behind the decision.
Imanaliev noted the remarkable achievements China has made in terms of political, economic and social development.

Facts prove the correctness of China's development path since the adoption of the opening up and reform policies, Imanaliev said.

He also said China is an important SCO member that has contributed significantly to the organization's development.

Imanaliev also said the SCO respects a country's sovereign right to choose its own development path, adding that he believes China will make further contributions to regional stability and prosperity.

Source: Xinhua

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