Showing posts with label Inflation. Show all posts

Sunday, January 8, 2023

Interest and inflation rates, how high is high?

AS we welcome 2023, one of the central themes this year will be how high will interest rates rise after the relentless pursuit taken by global central banks in fighting inflation with persistent and measured rate hikes in 2022.

As can be seen from Chart 1, from the 75 basis points (bps) hike by the Bank of Thailand to the 425 bps hike by the US Federal Reserve (Fed), the year 2022 has certainly been a busy year for central banks.

Central banks had no choice but to raise rates to fend off inflationary pressure that has been persistent throughout the year, although there have been some signs of easing lately.

Not to be left behind, even the Bank of Japan, while not lifting key benchmark rate, allowed its 10-year Japanese government bonds to move 50 bps from its 0% target, instead of 25 bps earlier.

It is a move that is seen recognising that inflation is finally biting the Japanese too.

CLICK TO ENLARGE

Chart 2 shows that based on November 2022 statistics, the depositors are at the losing end as the 12-month deposit rate was 132 bps lower than the monthly inflation print of 4%.

Can inflation be tamed?

Reading inflationary pressures and forecasting where it is going is not an easy task especially when inflation prints itself is a combination of many factors and not just commodity prices and supply chain disruption that has been the core issues among central banks the past year. Although the global economic momentum has eased, global aggregate demand is still rising and much higher than it was before the pandemic.

Hence, there has been not only a persistent rise in consumer demand but one that is not matched by consistent supply provided in the marketplace, resulting in a hike in aggregate prices.

In theory, inflation is tamed by using monetary tightening measures as it is believed that by raising interest rates, consumers and businesses will be impacted by higher borrowing costs, resulting in lower consumption as well as a slower pace of investments, which in turn will reduce aggregate demand.

Nevertheless, rate hikes have also other consequential impacts on the economy in the form of a weaker or a stronger currency, depending on the relative increase in domestic rates vis-à-vis the comparative increase in other corresponding currencies.

For example, for the United States, the relentless increase by the Fed has caused a significant rally in the US Dollar Index, which rose to a high of US$114 (RM501) last year, up almost 20%, before easing to close the year at US$103 (RM454), down 9.3% from its peak, but still higher by more than 8%.

The surge in the dollar made US imports cheaper from the rest of the world, in particular those from China, even cheaper, which allows the US retail prices at the store to be relatively lower than they used to be before the rally in the dollar.

In essence, while the surge in US interest rates has reduced disposable income due to higher borrowing costs, which in turn lowered consumer demand, it has also caused imported end product prices to be relatively cheaper than before, allowing aggregate prices to be lower as well.

This suggests that US consumer products are in for a double-whammy in terms of prices as aggregate demand has been reduced due to lower disposable income and at the same time for products that are imported, prices too have eased due to the strength of the greenback.

For an economist, this is good news as the intended outcome will likely be achieved in taming inflationary pressure due to persistent hikes in interest rates. A look at inflation prints from the peaks in 2022, both the core Consumer Price Index (CPI) and the Personal Consumption Expenditures index (PCE) have eased, falling by 67 bps and 62 bps from the highs and were last seen at 6% and 4.7% respectively.

Are we there yet?

After a 425 bps hike, the Fed’s message in the minutes of the Federal Open Market Committee (FOMC) released this week was an important one as it guided the market to expect higher rates going into 2023 but at the same time also signalled that the war against inflation is far from over and the Fed will continue to raise rates until it can achieve its targeted inflation print.

Compared with its September forecast of 4.6%, the Fed has now raised its median Fed Fund Rate (FFR) for 2023 to 5.1%, an increase of 50 bps while at the same time, the Fed also expects median FFR to drop by 100 bps each in 2024 and 2025 to 4.1% and 3.1% from earlier projected rate of 3.9% and 2.9% respectively.

Core PCE inflation, which is the Fed’s benchmark rate for inflationary pressure, is now expected to hit a median rate of 4.8% in 2022 before easing to 3.5% and 2.5% in 2023 and 2024 respectively.

By all means, the Fed is forecasting that inflation will be tamed in time to come. Hence, in all likelihood, we have seen the peak in inflationary pressure but perhaps we will be in for a higher US rate for longer before we see the Fed’s pivot.

Contrary to market expectations, the FOMC minutes this week revealed that the Fed is not expected to cut rates in 2023.

As for the market, based on Fed Fund Futures the Fed is expected to raise the FFR by 25 bps each over the next three meetings to reach 5.00% and 5.25%, followed by two rate cuts of 25 bps each in the second half of 2023, bringing the FFR back to 4.5% and 4.75% at the end of 2023.

Bank Negara to stand pat?

Compared to many central banks in the region or globally, Bank Negara move to raise the benchmark Overnight Policy Rate (OPR) by 100 bps last year is seen as rather muted.

Based on the year-to-date core CPI of 2.9% up to November 2022, the inflationary pressure experienced by Malaysia remained within Bank Negara’s forecast of between 2% and 3% for the year and going into 2023, core inflation prints will remain elevated at the beginning of the year but may ease later on, especially with the current government’s efforts in reducing the cost of living.

Given that scenario and the likelihood that the Fed and other regional central banks too are almost done raising rates, Bank Negara may stand pat and leave the OPR unchanged for 2023 at 2.75%. After all, a higher rate of between 25 bps to 50 bps as predicted by many broking firms will only result in higher borrowing costs for consumers and businesses, a move that will likely accelerate the pace of economic slowdown in 2023. By leaving the OPR unchanged, Bank Negara is signalling that it is done with raising rates and the current rate remains commodative and supportive of economic growth.

Positive real returns?

One of the arguments for higher interest rates is whether depositors are getting positive real returns, which is the difference between fixed deposit rates and inflation prints.

Chart 2 shows that based on November 2022 statistics, the depositors are at the losing end as the 12-month deposit rate was 132 bps lower than the monthly inflation print of 4%.

However, interestingly, as the market is anticipating rate hikes of 25 bps in the January 2023 Monetary Policy Committee meeting and another hike in March 2023, 12-month fixed deposit rates of many banks have passed the 3% mark and depositors could even easily enjoy rates up to 4% as promotional activities to attract fresh deposits have intensified over the past month. With that, depositors are already getting returns close to the headline monthly inflation prints.

In conclusion, while it makes sense for Bank Negara to stand pat and not raise rates in its first two meetings this year as widely expected, the market has already priced in the scenario that the central bank is ready to raise rates by 50 bps to take the benchmark OPR to 3.25%, the level last seen in March 2019, almost four years ago.

Pankaj C Kumar Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.

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Tuesday, September 20, 2022

The strong dollar should not become a sharp blade to cut the world, THE NEED FOR BRETTON WOODS III

Is the Dollar the key to US hegemony?

Illustration:Chen Xia/Global Times

The US Federal Reserve will hold a new policy meeting on Tuesday and Wednesday, with the decision on interest rate growth being the limelight. It is widely anticipated that the Fed will deliver at least another 75-basis-point interest rate hike to tame inflation. This might further increase the value of the US dollar against other currencies, which is at its 20-year high. Driven by the Fed's aggressive rate hikes, the US dollar is viewed as "experiencing a once-in-a-generation rally." For many countries in the world, this might be the beginning of another nightmare.

The meeting will witness the fifth time that the Fed will raise interest rates. The direct reason is to ease the high pressure of inflation in the US. But if people dig the root cause, this is an inevitable consequence of US' blind and unlimited money printing to temporarily maintain "prosperity." In other words, in the face of the deep-seated problems exposed by the 2008 financial crisis, Washington has been powerless, and unwilling as well, to solve them. Instead, it was extremely short-sighted to cover up the crisis and curry favor with the Wall Street, while taking advantage of the hegemony of the US dollar to quietly treat the crisis like dumping wastewater - draining it to the world.

A super strong US dollar and the fall of other currencies will, to a certain extent, ease the scorching inflation in the US economy, but the world will have to pay for it, which is often referred to as "when the US is sick, the world has to takes pill." The ensuing severe inflation, economic recession and other problems have already appeared on a large scale in many countries. Thirty-six currencies around the world have lost at least one-tenth of their value this year, with the Sri Lankan rupee and Argentine peso falling by more than 20 percent, since the dollar strengthened.

This has not only worsened the already weak economies of Europe and Japan, but also forced a large number of developing countries to swallow the bitter pills of the economic recession caused by imported inflation. Countless families were impoverished overnight. This is a very abnormal situation that is not supposed to occur, but it is the cruel truth behind the US "containment of inflation."

In fact, since the end of World War II, the US has used dollar hegemony to carry out "financial looting" or "export crises" against other countries several times. As a widely popular phrase in the West goes, the US enjoys the exorbitant privileges created by the dollar and the deficit without tears, and used the worthless paper note to plunder the resources and factories of other nations.

Each round of dollar appreciation in the past decades has been accompanied by extremely bad memories: The Latin American debt crisis broke out in the first round, Japan suffered from the "lost two decades" during the second round and the Asian financial crisis took place during the third. Particularly in the Asian crisis, which is still fresh in many people's memories, more than 100 million middle-class people in Asia fell into poverty, according to the World Bank estimation. The strengthened dollar, time and again, cuts the world like a sharp blade.

Therefore, while the political elites in Washington boast of the "myth of the American system" and take credit for "alleviating the crisis," thousands of poor families around the world are being trampled by them. They are not unaware of this, but still collectively choose to be indifferent and arrogant, as if this is the privilege that the "hegemon" should enjoy. As US former treasury secretary John Connally put it in the 1970s, "The dollar is our currency, but it's your problem." Today, the dollar is once again the world's problem. In a sense, it's hard to believe that the "prosperity" of the US is clean and moral.

However, the crisis cannot be covered up forever. Washington keeps laying mines but never removes them, which will eventually explode the US itself. The incompetence of US financial policymakers has been exposed by the consecutive interest rate hikes that have contributed to the abnormal appreciation of the US dollar with the purpose of defusing the severe inflation.

For the US itself, what will rise accordingly are the cost of corporate financing, the pressure on residents to repay their loans, and the price of export production among others. Meanwhile, the credibility that the US dollar has as a global currency is being continuously exhausted by the US "beggar-thy-neighbor" policy. Now the anxiety and insecurity brought by the US dollar to the world has heralded the beginning of the decline of its hegemony - regarding Washington's insatiable exploitation, Europe, Asia, the Middle East and other regions have explored the path of "de-dollarization," leading to the inevitable diversification of the international monetary system.

The best way to restrain the rampaging hegemony is to practice true multilateralism. Whether it was the Asian financial crisis in 1997 or the global financial crisis in 2008, the world seemed to have stumbled more than once by the same stone, which, however, is not that firm anymore. The instability and fragility of international financial markets have once again become prominent. It is precisely at such times that the international community should be more determined to cooperate and build a reliable, systemic and long-term multilateral international financial system. This cannot wait.

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THE NEED FOR BRETTON WOODS III

World Affairs - Non-Partisan and Objective

The United States of America is in big trouble, short term and long term. In 2022, the stock market is crashing, bond market is down the most in 40 years, housing bubble is bursting, inflation is skyrocketing, debt is exploding, and GDP is shrinking. These are not temporary crises. Instead, they reveal systemic flaws in the American economy that is propped up by a rigged global financial system.

However, that fraudulent system is starting to crumble and the primacy of US dollar is in serious trouble, thanks to an emerging multipolar world. (Don't believe the nonsense that the US can keep printing infinite amount of dollars).

The US needs to default on its debt and start new. Declare bankruptcy and yet remain the #1 country. This will be the "Bretton Woods III" agreement.

Sounds ridiculous? Well, it's possible only if all the other countries are weak and nobody is strong enough to challenge the US.

This is why the US must not only crush Russia and China — its two biggest geopolitical rivals, but also weaken Europe. This paves the way for the US to establish a new global order which is similarly rigged and just as deceitful and corrupt — in order to prolong the American Century.

Dollar Hegemony

America's extraordinary power comes from the power of US dollar, which is the established global currency for trade. This also means that countries around the world have to accumulate US dollars in their foreign exchange reserves. But the US has been abusing its power by weaponizing the dollar through sanctions and confiscations of hard-earned reserves.

No wonder that China, Russia and others are seeking ways to circumvent the dollar in trade. Since 1999, the share of US dollar assets in central bank reserves has dropped by 12 percentage points—from 71 percent. Hence the share of US dollar in global reserves is now only 59%. When that number falls below 50%, the tectonic shifts in global finance will become more apparent to Americans.

To fully grasp the nature of the current world order, let's see how the US established the dollar as the world currency, carried about the biggest gold heist in human history, then defaulted on its obligations, but revived the moribund dollar with a clever deal. That's the story of Bretton Woods I and II.

Bretton Woods I - Gold-backed Dollar

WW2 was a wonderful thing for the US. First, it took the US economy out of the Great Depression. The US played the role of arms supplier and gladly watched European empires destroy themselves. Even before the war was over, the US brought in all the allies to Bretton Woods, New Hampshire, and said, "When the war is over, you will all be weak and broke. I will be the new empire and my dollar will be the global currency. And it will be as good as gold -- a guaranteed rate of $35 per ounce of gold."

This meant that if you have $35, you can go to a bank and get an ounce of gold!

The world agreed. When the war was over, everyone bought US dollar with gold and used it for trade. Huge amounts of gold were also physically transferred from Japan, Germany and other parts of the world into the vaults of the Federal Reserve Bank in New York.

This system worked until 1971 when the US suddenly declared that, "Oops, the dollar is not backed by gold anymore. If you have US dollars, they are just pieces of paper now. You cannot get your gold back!" People called it the "Nixon Shock."

1970s - When Fiat Dollar almost died

This was also the biggest gold theft in human history. But what could the world do? America had nuclear weapons and the mightiest military.

Of course, the switch to a fiat currency caused havoc. The value of US dollar fell precipitously and inflation skyrocketed. The US economy was in deep trouble. That's when the US elites came up with a clever idea to rescue the dollar and restore its primacy.

Bretton Woods II - The Birth of Petrodollar

How to make the dollar relevant? Hmm...What if everyone needed US dollar to buy something essential?

Like ... OIL. Brilliant!

This was the birth of Petrodollar.

Basically, the U.S. used Saudi Arabia’s oil to save the dollar. That is, Saudi Arabia (and other smaller producers) would sell oil only for US dollars. And to make sure that the Saudis don't get too powerful, they will be forced to recycle most of their profits back into the US economy. It was also a protection racket, which meant the US military would occupy Saudi Arabia and protect it from enemies.

Saudi King Faisal with Kissinger. Birth of Petrodollar. But why would the Saudis agree to this? Because the U.S. make Saudi Arabia the new king of oil and the most influential Middle East power ... after crippling Iran.

Win-win for the US.

Thus, the U.S. armed and funded Saddam Hussein of Iraq to wage a decade-long war on Iran. US provided arms/intelligence. Germany and France provided deadly chemical/biological weapons to Iraq. Here’s Donald Rumsfeld with Saddam in 1983.

Of course, the same Rumsfeld would bomb Iraq and kill Saddam twenty years later.

Thus, the Petrodollar deal with Saudi Arabia could be called as Bretton Woods II. It extended the life of the American Empire by a few more decades.

Bretton Woods III -

For the last four decades, countries around the world have been foolishly working hard for US dollars, buying US treasuries, and funding the American Empire. But within the next decade, those U.S. treasury bills and bonds might be worthless. Deja vu all over again.

The U.S. needs Bretton Woods, Version 3. Somehow, the world needs to write off all American debt and start the racket anew. But … with America still as #1 How the hell could this happen?? This is how:

If the world is full of weak countries, they will accept the new rules -- just like they did in 1944 and 1974. Imagine a world where Russia and Europe destroy one another. Imagine a world where Japan and India attack China … and they all get destroyed. A world on fire, destroyed by passion and bombs.

In that world, America will come in as the savior at the last moment, stop the war, and make everyone a happy vassal.

Great Reset. Bretton Woods III. New World Order. Call it what you will.

Conclusion

The wheels are in motion. After eight years of provocation, the US successfully forced Russia to invade Ukraine. And the US also brilliantly pulled Europe into the mess. Europe's economy is being crushed and de-industrialized.

As for China, the U.S. is trying its best to start a war using Taiwan as the pawn. Japan is being asked to re-militarize and procure 1000 long-range missiles. The US needs a few more years to manufacture this mother of all wars. A lot depends on India, since Japan wouldn't want to be the only Asian country to attack China.

Four years ago, I predicted all this in the article "The Most Dangerous Decade." However, much of the world is still happy to be mesmerized and led into the slaughterhouse.

Only Russia and China can change how this story evolves. If Putin can quickly and decisively win the Ukraine war, he can force a peace settlement with Europe.

And China needs to accelerate the internationalization of Yuan. There is no de-dollarization without a robust alternative financial system. China also needs to muster the greatest diplomatic efforts to make peace with Japan and India, the two most potent adversaries and puppets of the US.

In the most optimistic scenario, the Global South or the people of the developing nations can bring into fruition a new fair world without catastrophic wars or financial devastation. As Sun Tzu said, "The supreme art of war is to subdue the enemy without fighting."

https://mail.google.com/mail/u/0/#inbox/FMfcgzGqQclQQKsTXRZGBMLRQzQzJwZB

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Saturday, July 2, 2022

A matter of Cost: Stretching their ringgit further

Janet Chia, 48, watering the lettuce plants at her house compound in Seri Kembangan, Selangor. Chia and her husband have planted several vegetables in their garden for their own consumption.

Rise in prices pushes Ipoh folk to think of alternative ways to live within means

The hike in prices of essential items such as chicken, eggs, flour and vegetables has compelled ordinary folk in Perak to plant their own greens and herbs. Some are trimming their grocery bill or dining out less frequently by cooking simpler meals at home to better manage their household expenses. LIKE the rest of the nation, consumers in Ipoh, Perak, are feeling the pinch from the rise in the prices of goods, especially essential items.

The increase in prices is taking a toll on the people, leaving those in the low and middle-income groups struggling to cope.

Retiree Joginder Kaur Jessy, 67, said she had started to grow some vegetables in her house compound to help cut cost of buying greens.

She said eating out had always been expensive but cooking at home was no longer cheap either.

Expressing dismay at the rise in the prices of oil, vegetables, fish, chicken and eggs, she felt it necessary to cut back on some items as she was a pensioner.

“I have to be more prudent now and use less ingredients when cooking.

“I will probably have to look for a cheaper type of fish, eat less chicken, try to cook smaller portions, avoid wastage and make leftover food stretch over a few days,” she said.

Among the vegetables and fruits that Joginder has planted are chillies, okra, brinjal, lemon, mint, banana and papaya.

“Most of the prices of vegetables, fish and other seafood have tripled.

“Some fishmongers and vegetable and fruit sellers have taken this opportunity to raise the prices even further,” she added.

Holly Lai, 60, a marketing manager, said that at times cooking at home was more expensive than eating out.

Lai, who is single, said she used to cook at home, but after the increase in prices, she discovered it was not worth the effort.

Preferring fish and eggs in her diet, she noted that the prices of these items were not affordable.

“For me to cook a meal consisting of fish, rice and a vegetable, it will easily cost about RM15, not including the spices and other ingredients.

“In comparison, I can get a meal consisting of three dishes and rice for between RM5 and RM7 from a stall.

“During these trying times, I must choose wisely and cannot simply eat at expensive restaurants,” she added.

Teacher Ambiga Pillay, 60, said the government should step in to counter the increase in prices.

Ambiga says she cuts down on daily costs by cooking more often at home.

Many including herself, she said, were saving on daily living costs by cooking more often as well as cutting back on luxury expenditures and travel.

“I always cook at home although it is a challenge as I work full-time.

“People think that grocery prices are lower in Ipoh compared to Kuala Lumpur, but it is not true.

“Prices here are higher because there is less variety compared to other places,” she said, adding that some also looked for cheaper alternatives to save money.

“I plan my finances based on priority as well,” said Ambiga.

Family Wellness Club president P. Mangaleswary also noted that people had been complaining about the rising prices of essential items.

She said some members of the non-governmental organisation (NGO) complained about how prices of vegetables had gone up in wet markets.

Members were saying that 1kg of tomatoes now cost RM9 when it used to be about RM5 before, she told StarMetro.

“Just last weekend at a get-together, some said they were feeling the burden of rising food prices as other expenses such as transport and house rental were also going up.

“The government’s cash aid for the B40 group is hardly enough for them to cover the rising costs.

“The government needs to look into some concrete measures to increase the supply of food such as vegetables and chicken,” said Mangaleswary.

Mangaleswary suggests that the government give food suppliers some form of subsidy.

She said it was important to have control on prices of essential food items such as rice, sugar, flour, vegetables, fruits and chicken. To keep the supply chain going, she suggested that the government give suppliers some form of subsidy to help them overcome difficulties such as rise in price of chicken feed and transport cost.

“Of course, people must be reminded to be prudent and not to waste food,” she stressed.

Dr Richard Ng, president of NGO Ipoh City Watch, said although the country was transitioning into the Covid-19 endemic phase, the B40 folk in particular had little to cheer about.

Ng says government assistance must reach the target group on a more consistent basis.

He said those who had been jobless might have heaved a huge sigh of relief as they would be able to earn a basic living.

He highlighted that a chain reaction had been triggered with the implementation of the minimum wage, the war between Russia and Ukraine taking a toll on the world’s economy, and the government’s announcement on the removal of subsidy on cooking oil and other essential items.

“These events have caused the prices of petrol, gas, cooking oil and essential food items to go up by at least 30%.

“This diminishing purchasing power not only impacts the B40 group, but also those in the M40.

“Each time such a crisis happens, the government can ask the people to tighten their belt, take less sugar, grow their own vegetables, provide one-off monetary assistance and groceries.

“But in reality, these efforts cannot really address the hard times faced by the people,” said Ng.

Instead, he said political leaders should set an example by going down to the ground and checking if the efforts made by them were effective.

He said government assistance must reach the target group on a more consistent basis, instead of just providing one-off aid.

“One way to solve this is to ensure some sort of prepaid card is given for the poor to buy groceries and other essential items from authorised outlets selling goods at lower prices.

“Of course, the mechanism must be monitored strictly to ensure there is no abuse and products sold must be of a certain minimum standard,” Ng added.

StarMetro By MANJIT KAUR manjit@thestar.com.my

Stretching their ringgit further

Like the rest of the nation, consumers in Ipoh, Perak, are feeling the pinch from the rise in the prices of goods, especially essential items.

The increase in prices is taking a toll on the people, leaving those in the low and middle-income groups struggling to cope.

Joginder showing the brinjal growing in her garden.

Joginder showing the brinjal growing in her garden.Joginder showing the brinjal growing in her garden.