Be an entrepreneur or a politician?

Let your children decide on their employment choice

Most parents in their fifties are looking at retirement options when their children starts looking for employment after their studies. There is this transition moment in our family circle of life where the baton of employment, career or business is being passed to the next generation.

The older generation after 30 years of slogging, looks forward to easier passing of days without the responsibilities and worries whilst the younger generation looks forward with optimism and high hopes of securing a good career ahead.

As an entrepreneur with businesses and investments, my natural instinct is to rope them into the family business, if any, as any typical old generation Chinese businessman will do. But I made up my mind some 7 years ago when my first born started his A Level, that my children will make their own choice whether they will prefer to seek employment elsewhere or participate in the family business. It will be their choice and decision and I will support whole heartedly whatever decisions they will make. 7 years later, I still have the same conviction.

I had this feeling that the business world and environment will be much different with all these globalization and technological advancement and the businesses that I was in will be operating in a much more competitive and disruptive world order. This has proven to be true.

The traditional brick and mortar businesses are under tremendous stress to keep up with new disruptive technologies and new business ideas.

My children will have to learn new skills and insights and they definitely will not be able to learn from my traditional family business unless I had instituted changes to my existing business to join the new business order. But I did not know how.

So it is better that they decide on their choice of employment in whatever industries they choose as long as they are working for a forward looking company who is able to embrace the new technological changes that is changing the business order across the global markets. And if they do decide later after some years of working experience to venture out as an entrepreneur, I will also support them wholeheartedly.

Assuming they are up to it, with the right attitude and skill sets.

Not everyone is capable of being a ‘successful’ entrepreneur. It is easy to start a business, call yourself a founder and entrepreneur but chances of being successful is limited to the capable few. For most cases, you are better off building a good career in a good organization rather than struggling in a small scale business for the rest of your life.

If you planned to be an entrepreneur, just make sure your business potential is scalable to a size that will earned you nett, double what you would be earning in a good job. Or else it will be a waste of time. The thrill of being your own boss wears thin over time when you are not doing well financially.

I have many friends who have done very well in their corporate careers and they seem very happy when we do meet up. They definitely look younger than me, with less stressful lines, a radiant and happy face. Compared to my aged face filled with worried lines and scars of agony suffered through the years. Was it worth it?

With the wisdom of hindsight, I am now able to advise my children on their decision making process on whether they should be a corporate suit or to go on their own. My only guidance to them is whatever choice they make, just ensure their actions are productive and contribute towards the well being of the economy. Don’t be lazy, do good where you can and be as good as you can be. Then start a family. Circle of life starts again.

The only career that I totally discouraged my children from is the job of a politician. Good politicians are hard to find nowadays. Since integrity left the politicians, good virtues and honesty followed. What is left is a shell of a conniving and corrupted politician using whatever means they can to stay in power supposedly representing the people’s interest.

All over the world, the politicians together with religious and racist bigots have caused total mayhem to our daily lives. People are divided by race, religion and skin colour. Nothing makes sense anymore. Throw in lots of money into a politician’s hands and we have absolute corruption across the ranks. Cash is king. Everybody can be bought. And I mean everybody.

What is really sad is the complete breakdown of morality and integrity of the human politician. Where he suffers no shame when he is openly corrupted. When he can sleep well even though he has done many evil things destroying the moral fabric of the society which he swore to protect. I have nothing but despise for these toxic politicians.

The few genuine politicians who stand up their grounds to all are few and far between. Eventually, they too will engulfed by the all pervasive influence of corruption.

To the younger generation joining the working community, my only advice is to pick a job that fits your personality and your skill sets. Make sure you enjoy the job. Get some proper working experience under your belt and you can evaluate your options in a more leisurely way.

You will know when there is a calling for you to become an entrepreneur. You will be unhappy with your job, your bosses irritates you, there is a burning desire that has just lighted up in your belly, a brilliant idea suddenly appeared and you feel that you are now ready to be an entrepreneur. Are you?

From experience, it takes a long time for an entrepreneur to make big fortune. If you do not have the patience, I recommend you a job that makes money faster than an entrepreneur.

Be a politician.

 Source: Tan Thiam Hock, On Your Own/Starbizweek

The writer is an entrepreneur who hopes to share his experience and insights with readers who want to take that giant leap into business but are not sure if they should.

Related posts:

 Entrepreneurship is not a job but providing a solution

Mar 28, 2016 ... Entrepreneurship is not a job. It's about providing a solution, and pulling people and resources together to make that change. Workable ...

Entrepreneur Liew Kee Sin from SP Setia to Eco World ...

Apr 25, 2015 ... Entrepreneur who drives the smaller Eco World group is still a much talked-about figure in corporate world. AT 57 years of age, Tan Sri Liew ...

 Promoting women entrepreneurs; mind your finances Jun 20, 2016 ... Do we need specific initiatives to help female entrepreneurs? Some say no, because men and women face similar obstacles in business.

 Different breed of entrepreneurs

Dec 17, 2011 ... I have admired a few master entrepreneurs in my short career and all of them tend to be “old school”. Nothing against the young entrepreneurs, ...

 1MDB business model relied on debt to form capital is ...

Apr 8, 2016 ... “1MDB relied on debt (bank loans, bonds and sukuk) to form its capital, ..... CORRUPTION as they obstruct natural justices and performance.

 Fighting corruption must be serious !

Jun 23, 2015 ... Fighting corruption, on the other hand, is more commonly associated with the Malaysian ... Malaysia's 1MDB's questionable accounts.

Money, culture and the chase for Olympic gold

 

>
https://youtu.be/-8qdKZhA_Uc

https://www.youtube.com/watch?v=63BmkZeq2mo

https://youtu.be/o2h1d6clCeE

 

Rio 2016 Olympic Games badminton mixed doubles winners - (from left) silver medallists Chan Peng Soon and Goh Liu Ying of Malaysia; gold medallists Tontowi Ahmad and Liliyana Natsir of Indonesia; and bronze medallists Zhang Nan and Zhao Yunlei of China. PHOTO: REUTERS

Although some countries offer financial incentives to its athletes, a genuine sporting culture may be the best guarantee of success at the Games.

SHOCK and awe just about sums up the stunning achievement of young Singaporean swimmer Joseph Schooling at the Rio Olympics.

His victory is classic David beating Goliath; he was the underdog from a tiny country that had never won an Olympic gold.

What made it all the sweeter and remarkable is that Schooling beat the mightiest, most decorated Olympian in history – American Michael Phelps who has won 23 gold medals – and set an impressive new record of 50.39 secs for the 100m butterfly event.

When news of Singapore’s first gold medal broke, it quickly overtook other stories emanating from Rio and became the talk of the world.

It eclipsed its Asean neighbours’ own Olympic gold successes: Vietnam’s shooter Hoang Xuan Vinh in the 10m air pistol competition and Thailand’s weightlifters Sopita Tanasan and Sukanya Srisurat in their individual weight classes and certainly overshadowed Malaysian diving duo Pandelela Rinong and Cheong Jun Hoong’s silver in the women’s synchronised 10m platform diving.

All are no small feats but there is a total of 28 sports in the Games, not counting those with multiple disciplines, and the most popular ones for a global audience are gymnastics, track and field and swimming, according to topendsports.com.

Among Asian nations competing in the Games, China and Japan are traditionally strong contenders in gymnastics and swimming although the Chinese gymnasts seem to be doing poorly this time around.

For most other Asian competitors, the sports they excel in tend to be the ones with less mass appeal like archery, shooting, judo, badminton and for some strange reason, women’s weightlifting.

Apart from the Thais, Taiwanese, Filipina and Indonesian female weightlifters have also won medals for their countries.

China remains the sporting powerhouse of Asia, sending its largest delegation of 416 athletes to Rio this year, but they have failed to defend their gold medals in sports they used to dominate like badminton and diving.

As for the glamorous track and field events, there doesn’t seem to be any Asian athlete who can challenge the likes of Usain Bolt.

Meanwhile, the other Asian powerhouse, India, with the second largest population in the world, has never done well at the Olympics, which has been the subject of intense debate among Indian and foreign sports pundits.

India also sent its biggest ever contingent of 118 sportsmen and women, and has so far won only a bronze medal in wrestling. Winning an Olympic gold medal is the Holy Grail of sports.

The pomp that surrounds the Games gives the gold medallists unparalleled honour and prestige. And the nations they represent go into collective convulsions of ecstasy and nationalistic joy, which make their governments equally happy.

That’s why many nations pour millions into sports programmes to nurture and train promising talents and offer great financial rewards to successful Olympians.

Schooling will get S$1mil (RM3mil) from the Singapore government for his gold medal. Vietnam’s Hoang reportedly will receive US$100,000 (RM400,000), a figure, according to AFP, that is nearly 50 times greater than the country’s average national income, of around US$2,100 (RM8,400).

Malaysia, which is seeing its best ever performance in Rio, thanks to its badminton players and divers, rewards its successful athletes handsomely under its National Sports Council incentive scheme.

An Olympic gold medal winner will receive RM1mil and a monthly pension of RM5,000; a silver medallist, RM600,000 and a RM3,000 pension while a bronze winner gets RM100,000 and a RM2,000 pension.

Taiwan, India, Indonesia, the Philippines, South Korea and Thailand have similar monetary reward schemes. North Korea uses a carrot and stick scheme: huge rewards for medal winners and hard labour for the failed ones.

Several western countries have the same financial bait, including the United States, France, Russia and Germany, but at a lower rate.

Does it work?

The Technology Policy Institute looked for a correlation and was mindful of variables like country size and income, “since those are surely the biggest predictor of how many medals a country will win: more populous countries are more likely to have that rare human who is physically built and mentally able to become an Olympic athlete, while richer countries are more likely to be able to invest in training those people.”

The researchers found no correlation between monetary payments and medals and said it was not surprising in some countries. In the United States, for example, a US$25,000 (RM100,000) cash award would be dwarfed by million-dollar endorsements the athlete could get.

The researchers also set out to see if the results were different for countries with lower opportunities for endorsements. Their conclusion: “overall the evidence suggests that these payments don’t increase the medal count” either.

Rather, countries that do well are those with a longstanding sporting culture that values and nurtures their athletes long before they qualify for the Olympics.

That is evident in Western societies where sportsmen, even at the college level, are feted and idolised. In Asia, however, the emphasis is more on book-learning and earning prestigious degrees.

The BBC quotes Indian Olympic Association head Narayana Ramachandran as saying India’s sorry performance is more than just a shortage of cash or organisation.

“Sport has always taken a back seat vis-á-vis education. Most Indian families would prefer their children became dentists or accountants than Olympians,” he says.

But that attitude is surely changing as more Asian sportsmen and women go professional and are able to make a good living.

In Malaysia, its most popular sportsman, badminton star Datuk Lee Chong Wei, is highly successful with a number of endorsements under his belt.

For now, it is still the Western countries that dominate the Olympic medal tally table. But it’s only a matter of time before more Asian nations, once no-hopers at the Games, rise up the charts.

It’s already started. The Rio Games will go down in history as a watershed for Asean, with two member states – Singapore and Vietnam – winning their first gold medals. May it be so for Malaysia, too.

 By June H.L Wong Chief Operating Officer (Content Development) The Star, Malaysia.
The writer was the former group chief editor of The Star Media Group Malaysia. This is the eighth article in a series of columns on global affairs written by top editors from members of the Asia News Network and published in newspapers across the region.

Heartbreak again for Chong Wei, Chen Long takes gold

 

The medallists (from left): Silver medallist Chong Wei, gold medallist Chen Long and bronze medallist Viktor Axelsen on the podium at Riocentro Pavilion 4. - AZHAR MAHFOF / The Star

https://youtu.be/63BmkZeq2mo

RIO DE JANEIRO: Lee Chong Wei, the king of Malaysian badminton, will leave the Rio de Janeiro Olympics without the crown – and so will Malaysia without the coveted gold.

The 33-year-old lost his third Olympic final after going down 18-21, 18-21 to Chen Long at the Riocentro Pavilion 4 on Saturday.

It was indeed a painful end for Malaysia as it was the third false dawn. Earlier, Malaysia had also lost in the men’s doubles and mixed doubles finals.

Malaysia thus will return home with a total of four silvers and one bronze.

The other three silvers came from Chan Peng Soon-Goh Liu Ying (mixed doubles), Goh V Shem-Tan Wee Kiong (men’s doubles) and divers Pandelela Rinong-Cheong Jun Hoong (women’s 10m platform synchro). Cyclist Azizulhasni Awang contributed the sole bronze through the men’s keirin.

Both Chong Wei, playing in probably his last Olympics, and Chen Long went onto the court to loud cheers from their countries’ supporters.

Chong Wei, who lost to Lin Dan at the 2008 Beijing and 2012 London finals, looked tentative in the beginning to allow Chen Long to open up a 4-0 lead. But he recovered his composure to lead 5-4.

After that, they traded point until it was 7-7 before Chong Wei pulled away for an 11-7 and then 14-10 lead.

But Chen Long refused to go away and managed to level at 14-14.

Twice Chong Wei surged in front but Chen Long capitalised on the Malaysian’s mistakes at the net to lead 20-17. Although world No. 1 Chong Wei managed to save one match point, his failure to return a smash gave Chen Long a 21-18 win in 35 minutes.

Oozing confidence, Chen Long was always in front in the second game – leading 4-1 and 5-2.

But Chong Wei fought back to go 8-5 up. Chen Long then went on a smashing spree, winning six points for an 11-8 advantage.

The 27-year-old world No. 2 never looked back after that as he always had at least a three-point lead.

Everything looked lost for Chong Wei as Chen Long reached 20-16. The Malaysian saved two match points but then sent the shuttle out to lose 18-21 in 38 minutes.

For Chen Long, it was his first Olympic gold to add to his two All-England and World Championships crowns.

Chong Wei can only look in envy as he’s still without a world or Olympic crown. He also lost in three World Championships finals.

Chen Long’s gold was only China’s second at these Games after Fu Haifeng-Zhang Nan triumphed in the men’s doubles.

Earlier, two-time Olympic champion Lin Dan fell from grace in probably his last Olympic outing after losing 21-15, 10-21, 17-21 to Dane Viktor Axelson in the 70-minute bronze medal playoff.

Medals By Countries - Rio 2016

London 2012 Olympics - Medal Table

Rio 2016 Asia Regional Aug 21 Medal by Countries

Rio 2016: China’s women golfer Lin makes Olympic history with hole-in-one shot

https://youtu.be/aI8F151tWOI

Related posts:

Singapore's first Olympic gold medal, dreams do come true !

Joseph Schooling celebrates his gold win next to Michael Phelps on Aug 12. PHOTO: REUTERS https://youtu.be/-JTwPEutLdY RIO DE JANEIRO...

Rio 2016 Olympics sets good example; Smug Aussie swimmer won’t cloud Rio

The Olympic flame burns in Maracana Stadium during the opening ceremony at the 2016 Summer Olympics in Rio de Janeiro, Brazil, Aug 5, 20...

  Malaysia's Datuk Lee Chong Wei vs China's Lin Dan; what difference for winner/loser? 

 Malaysia's Datuk Lee Chong Wei vs China's Lin Dan ...

Aug 7, 2012 ... Malaysia's Datuk Lee Chong Wei vs China's Lin Dan; what difference for winner/ loser? DAP's Manoharan under fire over disparaging tweets ...

Malaysia must develop new sport talents after Chong Wei

The global mahjong winner's curse

 

Like mahjong: The current world situation is like the Chinese game of mahjong which has four players with a limited number of chips. If one player is the persistent winner, he or she ends up with all the chips and the game ends.

 

Winners and losers in the global economy of 2025

 Winners and losers in the global eco

There is grave concern that the world economy is slipping into what Harvard professor and former US Treasury Secretary Larry Summers calls the global secular deflation. In simple terms, growth has slowed without inflation, despite exceptionally stimulative monetary policy. Larry’s view is that the advanced countries can use fiscal policy to stimulate growth, using massive investments in infrastructure. If needs be, this can be financed by central banks.

Central bank financing fiscal deficits is technically called “helicopter money”, named by the late monetarist economist Milton Friedman as the central bank pushing money out of the helicopter. Strict monetarism thinks that this would cause inflation.

The simple reason why the world is moving into secular deflation is that the largest economies are all slowing for a variety of reasons. Unconventional monetary policy applied since the 2007 crisis has brought central bank interest rates to zero or negative terms in economies accounting for 60% of world GDP.

Most economists blame current slow growth to “lack of aggregate demand” or “excess of aggregate production”. The rich countries are mostly aging and already heavily burdened with debt, so they cannot consume more. After the 2007 global financial crisis, the emerging market economies have slowed down, as demand for their exports have slowed. We are in a vicious circle where global trade growth is now slower than GDP growth, because the US economy is no longer the consumption engine of last resort. China, which has been a huge consumer of commodities, has slowed. Japanese growth has been flat due to an aging population. European growth has not recovered, partly because the leading economy, Germany, calls for austerity by its southern partners.

The Brexit shock threatens to weaken global confidence and send growth down another notch.

Former Bank of England Governor Lord Mervyn King famously called the global monetary order a game of sodoku, in which national current accounts in the balance of payments add up to a zero sum game. This is because in the global trade game, one country’s current account deficit is another country’s surplus. In the past, if the US runs larger and larger current account deficits, world growth is stimulated because everyone wants to hold dollars and has been willing to supply the US with all manners of consumer goods. This has been called an “exorbitant privilege” for the dollar.

The present global monetary order or non-order is a result of the 1971 US dollar de-link from gold, which gave rise to a phase of floating exchange rates and rising capital flows, which some people call Bretton Woods II. The old order, set at the Bretton Wood Conference of 1944, centered around a system of global fixed exchange rates, based on the US dollar link with gold price at US$35 to one ounce of gold.

But flexible exchange rates has resulted in a system where everyone seems to be devaluing their way out of trouble. Has the global secular deflation something to do with Bretton Woods II?

My answer must be yes. The reason lies in what I call, instead of sodoku, the mahjong winner’s curse. The Chinese game of mahjong has four players with a limited number of chips. If one player is the persistent winner, he or she ends up with all the chips and the game stops. Since the global game of trade cannot stop, the winner has both an exorbitant privilege (of being funded by the others) and an exorbitant curse (of bearing the loss if the others won’t or refuse to pay). To keep the game going, the winner has to give or lend the chips back to the other players, who play with the hope of winning the next round.

Indeed, if the winner is generous, the game can be made bigger, because the winner can issue more chips (defined as a reserve currency), which the others are more than willing to borrow and play.

The current world situation is that the Winners are the four reserve currency countries, the dollar, euro, yen and sterling, all of which have interest rates near zero or even negative. Until recently, the Winners blame China and the oil producing countries as having too high current account surpluses. But recently, after the huge European cutback in expenditure, Europe as a whole is the world’s largest current account surplus group of nearly 5% of GDP.

Herein lies the winner’s curse. The emerging markets should be able to stimulate global growth, but are unwilling to run larger current account deficits because they cannot get financing. The richer economies can stimulate global growth, but they are unwilling to do so, because they either feel that they already have too much debt or because they worry that stimulus would lead to inflation.

However, reserve currency countries have an advantage. As long as they are willing to run current account deficits, there will be little inflation because the world economy has huge excess capacity and surplus savings. If emerging markets run higher current account deficits, they will have to depreciate, which is exactly what Brazil, South Africa and others have done.

The winner’s curse is that if Europe is now unwilling to reflate and spend, the world will continue to slow. Indeed, in a world of greater geo-political risks, money is fleeing to the US dollar and the yen, causing both to appreciate.

What these capital flows into the reserve currencies when their interest rate is zero and they are unable to reflate imply is that the dollar and yen play the deflationary role of gold in the 1930s. As more and more mahjong players hold gold and don’t spend, the world global trade and growth game slows further. The mahjong winner’s curse requires the winners to stimulate and spend, bearing higher credit risks. That’s the privilege and responsibility of winners in the global game. If not, look out for more global secular deflation.

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

Related posts

Modern finance and money being managed like a Ponzi scheme!

Mar 5, 2016 ... Modern finance and money being managed like a Ponzi scheme! Economic Collapse soon? Ponzi schemes and modern finance. Andrew ...

 Dealing with the new abnormal negative interest rate ...

Jun 15, 2016 ... Modern finance and money being managed like a Ponzi scheme! Economic Collapse soon? Ponzi schemes and modern finance. Andrew.

 Beware when elephants Trump-et! Trump victory a major ...

Mar 19, 2016 ... In other words, growth accelerates exponentially until the economy reaches maturity and slows down, and if there is no longer ... Modern finance and money being managed like a Ponzi scheme! Economic Collapse soon?

 The alchemy of money

May 14, 2016 ... Finance is a derivative of the real economy, which can be leveraged or multiplied as ... value of the underlying asset – which were triggers of the global crash of 2007, ... all lending) can only be implemented after the next and coming crisis. ... Modern finance and money being managed like a Ponzi scheme !

 

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

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

 

Pedestrians crossing in Tokyo. Quantitative easing stopped a debt implosion, but its initial success enabled politicians to avoid structural reforms, The result was slower growth from declining productivity, even as companies and governments continued to borrow. In short, we are in a debt trap! 

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

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

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

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

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

High levels of investment – and debt – are good for China’s economy

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

Emerging markets

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

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

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

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

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

China lacks urgency about its debt problem, IMF says

Negative interest rates are causing a major problem in the global economy

 Central banks charged with reviving growth using only monetary policy are now actively using negative interest rates and desperate enough to think about helicopter money.

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

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

Helicopter money

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

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

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

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

China’s banking regulator moves to contain off-balance-sheet risk

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

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

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

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

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

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

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

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

Related posts:

Beware when elephants Trump-et! Trump victory a major ...

Mar 19, 2016 ... Increasingly, they use quantitative easing (QE) or unconventional monetary policy to try and expand aggregate demand. The trouble is that QE ...

 

 Modern finance and money being managed like a Ponzi ...

Mar 5, 2016 ... Under globalisation, the smaller reserve-currency countries like the euro zone and Japan can engage in quantitative easing, because instead...

 To fellow US interest rate hike or to cut rates?

Dec 19, 2015 ... The European Union and Japan are still engaged in quantitative easing and are keeping rates near zero or in the case of the EU, in negative .

 Don't blame China for global economic jitters; China ...

Jan 24, 2016 ... ... the recovery has been driven by asset market bubbles, blown up by the injection of cash into the financial market through quantitative

The alchemy of money

Former Bank of England governor claims that for over two centuries, economists have struggled to provide rigorous theoretical basis for the role of money and have largely failed.

 

The Bank of England in the City of London.

MONEY makes the world go round, so you would have thought that economists understand what money is all about.

The former governor of the Bank of England, Lord Mervyn King, has just published a book called The End of Alchemy, which made a startling claim that “for over two centuries, economists have struggled to provide rigorous theoretical basis for the role of money, and have largely failed.” This is a serious accusation from a distinguished academic turned central banker.

Alchemy is defined as the ability to create gold out of base metals or the ability to brew the elixir of life. King identifies that the main purpose of financial markets is to help real economy players to cope with “radical uncertainty”. But as we discovered after the global financial crisis, financial risk models widely used by banks narrowly defined risks as statistical probabilities that could be measured. By definition, radical uncertainty is an “unknown unknown” that cannot be measured. It was no wonder that the banks were blind to the blindness of financial models, which conveniently assumed that what cannot be measured does not exist. Ergo, no one but dead economists is to blame for bank failure.

When money was fully backed by gold, money was tied to real goods. But when paper currency was invented, money became a promisory note, first of the state – fiat money, supported by the power to impose taxes to repay that debt, and today, bank-created money, which is backed only by the assets and equity of the bank. The power to create “paper” money is truly alchemy – since promises by either the state or the banks can go on almost forever, until the trust runs out.

Today national money supply comprises roughly one-fifth state money (backed by sovereign debt) and four-fifths bank deposits (backed by bank loans and bank equity). Banks can create money as long as they are willing to lend, and the more they lend to finance bad assets, the more alchemy there is in the system.

A good description of financial alchemy is provided by FT columnist Prof John Kay, whose new book, Other People’s Money, is a masterpiece in the diagnosis of financialisation – how the finance industry traded with itself and (almost) ignored the real world. For example, Kay claimed that British banks’ “lending to firms and individuals in the production of goods and services – which most people would imagine was the principal business of a bank – amounts to about 3% of that total”. How is it possible that “the value of the assets underlying derivative contracts is three times the value of all the physical assets in the world”?

The answer is of course leverage. Finance is a derivative of the real economy, which can be leveraged or multiplied as long as there is someone (sucker?) willing to believe that the derivative has a “sound” relationship with the underlying asset. There are two pitfalls in that alchemy – a sharp decline in leverage and a fall in the value of the underlying asset – which were triggers of the global crash of 2007, as fears of Fed interest rate hikes tightened credit and questions asked about risks in subprime mortgage assets that were the underlying assets of many toxic derivatives.

Unfortunately, as we found to everyone’s costs, the banking system itself became too highly leveraged relative to its obligations, without sufficient equity nor liquidity to absorb market shocks.

The real trouble with financialisation is that central bankers, having not taken away the punch bowl when the party got really heady, cannot attempt anything like even trying to move in that direction without spoiling the whole party. Any attempt to raise interest rates by the Fed would be considered Armageddon by those who have huge vested interests in bubbly asset markets. Instead, central bankers like Mario Draghi has to continue to talk “whatever it takes” to continue the game of financialisation.

King’s recommendation that central banks reverse alchemy by behaving like pawnbrokers for all seasons (having collateral against all lending) can only be implemented after the next and coming crisis. Central bank discipline, like virginity, cannot be replaced once lost. The market will always think that in the end, it will be bailed out by central banks. In the end the market was right – it was bailed out and will be bailed out. In the game of playing chicken with finance, the politicians will always blink.

If we accept that radical uncertainty lies at the heart of finance, then money makes the world go around because it provides the lubricant of trade and investment. Without that lubricant, trade and investment would slow down significantly, but with too much lubricant, the system can rock itself to pieces.

The dilemma of central banks today is also globalisation. In addition to the Fed controlling dollar money supply within the US borders, there are US$9 trillion of dollars created outside the US borders over which the Fed has no control. Money today can be created in the form of Bitcoins, computerised digital units that tech people use to trade value. But Bitcoins ultimately need to be changed into dollars. So as long as someone will accept Bitcoins, digital currency become convertible money.

We got into a monetary crisis in which bad money drove out good. The reason was because the financial sector, in collusion with politics, refused to accept that there were losses in the system, so it printed more money to hide or roll over the losses. Surprise, surprise, there was no inflation, because the real economy, having become bloated with excess capacity financed by excess leverage, had in the short run no effective demand. So inflation at the global level is postponed.

But if climate change disrupts the weather and create food supply shortages, inflation will return, initially in the emerging economies, which cannot print money because they are not reserve currencies. In time, inflation will come back to haunt the reserve currency countries. But not before the emerging markets go into crises of inflation or banking first.

Money is inherently unfair – the rich will always suffer less than the poor.

In medieval times, only those with real money could afford alchemy. If it was true then, it remains true today.

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



Related posts:

 Modern finance and money being managed like a Ponzi scheme ! Economic Collapse soon?

Mar 5, 2016 ... Ponzi schemes and modern finance. Andrew Sheng says when the originator of a scheme to pass on debt to others is also 'too big to

Hedge funds invasion of US treasuries puts bond at risk, more turbulence in US debts market

Mar 29, 2016 ... Hedge funds invasion of US treasuries puts bond at risk, more ... into U.S. Treasuries, and that has bond traders bracing for more turbulence. ... The Treasury Department is already looking into whether the market isn't running ...

Modern finance and money being managed like a Ponzi scheme! Economic Collapse soon?

Ponzi schemes and modern finance

Andrew Sheng says when the originator of a scheme to pass on debt to others is also ‘too big to fail’ – like America – then the global economy is heading for some painful restructuring

The dilemma today is that the US is the world’s largest “too big to fail” debtor, with gross international liabilities of US$31 trillion, equivalent to 40 per cent of global GDP. Photo: AFP

THIS global financial crisis is not over, as the volatile start to the New Year showed that 2016 may be a precursor to the 10th anniversary of the 2007 sub-prime crisis, which itself evolved from 1997 Asian Financial Crisis, after which the US Fed cut interest rates and started the rapid financialisation of the US economy.

READ MORE: Don’t listen to the ruling elite: the world economy is in real trouble

Two terms came out of the crisis that we see almost everyday, but have not been explained well by modern financial theory. Most economists think of them as aberrations that are at the periphery of normal economic behaviour. In fact, “Ponzi schemes” and “Too-Big-to-Fail” are at the heart of individual and social behaviour which go a long way to explain what is happening today.

A Ponzi scheme is a scam named after American Charles Ponzi. The term Ponzi scheme started in the 1920s from an American Charles Ponzi, who thought of selling an idea in making money from arbitraging the value of international reply coupons in postage stamps to a larger and larger investor scheme where he made money by getting new investors to pay for promised high returns to old investors. Of course, this is the “borrowing from Peter-to-Pay-Paul principle”, where the music stops when everyone want their money back. Ponzi schemes should in principle collapse naturally because it is of course impossible to pay unusually high returns. By this time, the founder would have run away to the Caribbean with a lot of OPM (other people’s money).

 

A foreclosure sign tops a “for sale” sign outside a property in northwest Denver in this 2007 photo. The number of homeowners receiving foreclosure notices hit a record high in the spring, driven up by problems with subprime mortgages. Photo: AP

The securitisation (packaging) of sub-prime mortgages into CDOs (collateralised debt obligations) and turbo-charging these into CDO2 (creating a highly leveraged synthetic financial derivative) and selling these to investors with a AAA credit rating was a 21st century Ponzi variant.

In simple terms, this is like selling a box of rotting apples, getting a rating agency to say that the box is worth more than the individual apples, with a guarantee against losses by adding more (rotten apples). In the end, the investor is buying a box of rotting apples, in which all his savings have been eaten up by those who sold the boxes (the derivatives) in the first place.

There are two fundamental elements of Ponzi operations – the promise of very high returns (false expectations) and the widening of the investor circle. Variants of the Ponzi scheme can be found in asset bubbles and pyramid schemes, in which more and more investors (new suckers) are enticed in until they are the ones who bear the final losses. Like the game Musical Chairs, the ones who did not get out when the music stops are the losers.

Actually, Ponzi schemes work by the originator taking profits by selling (or passing) his losses to all his investors – the more suckers, the bigger his profits and the more people to share the losses.

Technically, a Ponzi scheme is sustainable if the new funds that come in actually deliver good returns, but because the Ponzi promises a return higher than anyone can actually deliver, most Ponzis end up as fraudulent schemes.

READ MORE: Bank woes bode ill for world economy as talk of another global financial crisis gains traction

 

Under globalisation, the smaller reserve-currency countries like the euro zone and Japan can engage in quantitative easing, because instead of getting inflation, their currencies depreciate against the dollar. Photo: Reuters

But the Ponzi element in modern finance should be understood with another phenomena – the Too-Big-To-Fail (TBTF) dilemma. We all know that if we borrow US$1,000 from the bank, we are in trouble if we can’t pay, but if we borrow US$1bil from the bank, it is the bank that is in trouble. Thus, if a Ponzi scheme reaches the scale of TBTF, it has to be “rescued” somehow, because if everyone had bought the Ponzi product, everyone ends up being the loser.

This is the essence of modern money. Advanced country central banks can engage in quantitative easing (QE or printing money in whatever way you want to call it) to bail out banks that are losing money, because their banks are TBTF. The difference between QE and Ponzi is that the QE interest rate promised is near zero to negative, but the escalation of scale is the same. I call these Qonzi schemes.

In theory, in a closed economy, if you print too much money, you would get higher inflation. This is why the Germans are very much against the European Central Bank’s QE measures.

However, in a world with excess production capacity, you would not get into high inflation, because there are many more people in the emerging economies who are willing to hold reserve currencies like the US dollar, euro and yen. Under globalisation, the smaller reserve currency countries like the eurozone and Japan can engage in QE, because instead of getting inflation, their currencies depreciate against the dollar. The losers call such action “beggar-thy-neighbour” policy.

In other words, currency depreciation countries gain by passing “losses” to others, because they gain competitive trade advantage. But if everyone depreciates at the same rate, the whole world ends up with more deflation. Remember, when the Ponzi music stops, all losses are crystalised. As Warren Buffett used to say, when the tide goes out, you know who has been swimming naked.

READ MORE: Chinese scramble to safety of US dollar as yuan weakens and forex reserves drop

  Rail cars and oil tankers sit on railway tracks as water vapour and smoke rise from a steel plant in the distance in Tonghua, Jilin province. The city's once-vaunted state-run steel mills have slipped inexorably into decline, weighed down by slumping global markets and a changing economy. Photo: Bloomberg
 

READ MORE: The crisis in markets shows how our financial and political leaders have failed since 2008

The dilemma in the world today is that the US is the largest TBTF debtor in the world, with gross international liabilities of US$31 trillion, equivalent to 40% of world GDP (gross domestic product). In a world where interest rates are near zero, the threat of the Fed increasing interest rates causes capital flight into the dollar. But a dollar that also yields near zero interest rate, with the inability to reflate due to political constraints, plays exactly the deflationary role of gold in the 1930s.

Hence, a strong dollar is deflationary on the whole world. As geopolitical tensions rise, flight into the dollar causes its own deflation. The latest US net international investment position is a deficit of US$7 trillion or 40% of GDP at the end of 2014, sharply up from US$1.3 trillion in 2007. A strong dollar in which the US would run larger even current account deficits is clearly unsustainable for the US and its creditors.

During the Asian financial crisis, countries with net liabilities of over 50% of GDP got into crisis. But the US is the TBTF country in the international monetary system. Further QE will not solve this dilemma. The only solution is painful structural adjustment by all concerned. This is why investors are all so downbeat.

Consequently, I see no alternative but a coming new Plaza Accord to ensure that the dollar does not get too strong, with a concerted effort to have global reflation. Otherwise, watch out for more “Qonzi” schemes.


- Andrew Sheng writes on global issues from the Asian perspective.

Peter Schiff Warns Of Economic Collapse In 28 May 2016 DAYLY NEWS