GUAN ENG & CO ARE GOOD – BUT THEY CANNOT STOP THE ONSLAUGHT OF AN IMMINENT GLOBAL ECONOMIC DOWNTURN

THE current world economic downturn does not wait for Malaysia to put right its internal socio-political strife regarding the continuous spate of hate speech, seditious and fake news postings on social media, and slanderous pictures and videos.

The bogeymen are usually the “Chinese DAP” and non-Malays out to seize whatever that is left of the privileges of the Malays. Weaponised and effectively used for decades, Umno politicians, and lately with PAS in the tag-team, have found easy mind manipulation targets among the Malays, especially those confined in rural areas with access to only one main mode of information – propaganda.

The recent Cameron Highlands by-election and the way of campaigning with lies, falsehoods and hatred is an attestation that the social and religious harmony of our society and nation has been.

Our nation is on a dangerous path of ruin if nothing is done to stop this rot.

There is no doubt that currently we are witnessing a worldwide economic cyclical downturn. But the people will only start to feel the burden in a year or two after it has started.

The US subprime mortgage crisis from 2007 to 2010 and the financial crisis in 2008, happened at a time when both inflation and interest rates were low, leading to the Federal Reserve (Fed) to launch quantitative easing from 2008 to 2014. As the interest rate was then already close to zero, the Fed had to resort to unconventional monetary policy by purchasing government bonds and other financial assets in order to stimulate the economy and increase liquidity. By doing so, it created money and increased the supply of bank reserves.

The Fed balance sheet has grown in size, from total assets of US$870 billion in August 7, 2007 to US$4.5 trillion in January 14, 2015. The increased liquidity went into the equity market, property market, and other assets. It was a period of artificial boom.

A decade later, after US$12.3 trillion was created (according to a CNBC report in 2016) by all central banks, economic growth has grind almost to a halt. Growth is below 2% especially in EU, Japan and the US. As such the Fed started a “normalisation” programme in October 2017. Normalisation is a nice sounding word to mean quantitative tightening, the reverse of quantitative easing. By October last year, all three major central banks (Fed, European Central Bank, and Bank of Japan) were in full swing in removing the money created in the financial system.

The Fed balance sheet is shrinking by US$50 billion a month, draining liquidity from the global financial markets. At this rate of unwinding, it will take another five years to unwind the more than US$3.7 trillion the Fed has created in the years of quantitative easing

Quantitative tightening kills the equity bull market. The world equity market started its synchronised decline from October 2018. Property markets the world over have been falling too. Big corporations will downsize or reinvent to more economies of scale.

Meanwhile, gold price, the contrarian of the stock market and a safe haven bet, has started to see an uptrend.

Not only is there financial unwinding in the current quantitative tightening, the Fed has gradually raised interest rate from 0% in December 2015 to the present 2.25%. The US dollar has strengthened. The return of investment for all currencies of the world, except for Saudi Arabia and UAE, in 2018 has been negative. Nations that have high dollar-denominated debt will be in trouble.

Malaysia’s current national debt is RM721 billion, with much of it denominated in ringgit. The debt to GDP ratio is 52%. Even though this is manageable, it can be stressful when foreign holders of Malaysian bonds fear default of our government’s debt obligations and start to sell, pushing bond yields higher. This in turn pushes the interest rate higher.

Individuals and corporations that are over exposed in loans and tight in cash flow will succumb to the current trend of rising interest rate, resulting in many bankruptcies.

Property prices are on the decline, with rising interest rates and banks less inclined to give out loans. With declining property value, the financial net value of the average Malaysian also declines.

It is obvious that the world economic downturn has vast ramifications on our nation and people. The specifics of the cause and effect will have to follow with a sequel to this piece. Meanwhile, Malaysians increasingly feel the burden of economic stress. It suffices to say that politicians, especially among the opposition, are irresponsibly ignorant to the approaching imminent hardship cause by the economic cyclical downturn.

– https://www.themalaysianinsight.com

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