The global mahjong winner’s curse


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.

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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

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.

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.

 

 

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.

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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.

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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.

 

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.

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Liberty, Equality and Fraternity in the 21st century of China’s One Belt One Road strategy


Mass migration: The mega-trend of global migration, which is already happening legally in the form of migrant workers and illegally in the form of economic and political refugees, especially into Europe, is going to disrupt the current order. – AFP

A VERY wise Latin American statesman remarked at the Emerging Markets Forum in Paris this month, quoting the Nobel Laureate writer Octavio La Paz that after the French Revolution, the 19th century was all about the search for liberty, the 20th century about equality and the 21st century should be about fraternity.

The concept of liberty and individual freedom was sparked by the French Revolution but it became embodied in the American constitution that individual freedom was almost absolute in its right. Before then, rights were communal and determined by the state, or at least by an elite. With the rise of American might, the primacy of individual rights became widespread, because it appealed to the individual ego and the right for self determination. But man does not exist alone – he lives in a community in which rights come with responsibility – self-respect must also be tempered with respect for others.

The 20th century was a flowering of the capitalist spirit, that individual greed can lead to public good. This drove unprecedented prosperity, unfortunately unequally shared. The saving grace was the narrowing of income and wealth differences between the rich nations and the developing economies, but in almost every country, income and wealth gaps widened. This has reached the stage where views are increasingly polarised, with huge gaps in understanding between genders, generations and geo-political powers. Gandhi was the one who rightly pointed out that the world has enough for all our needs, but not our greed.

The global financial crisis of the 21st century exposed all the flaws of the dominant thinking, that the American Dream is sustainable. It was already doubtful that it could be sustainable for a few, but if the population of the world reaches 10 billion by 2050, we will be so crowded and in each other’s face and space that how to achieve fraternity without war will be the question of the century.


The World in 2050

The Emerging Markets Forum in Paris was the occasion for a book launch on “The World in 2050”, a study by various leaders, such as former German Chancellor Horst Kohler, former IMF managing director Michel Camdessus and former presidents and ministers of several emerging markets. The book, edited by former World Bank director Harinder Kohli, tried to think through the major issues of the 21st century. The major theme was essentially demographic and geographic – by 2050, the largest populated nation will be India, but the third largest could be Nigeria, with Africa emerging as the third largest continent by population and growth.

The study is timely because there are already signs that the borders that were delineated by the former colonial powers in Africa and the Middle East are already breaking down as failed states, arising from bad governance, exploding population and climate change stresses leading to civil strife, outright war and now mass migration.

This mega-trend of global migration, which is already happening legally in the form of migrant workers and illegally in the form of economic and political refugees, especially into Europe, is going to disrupt the current order. Can Europe absorb over a million migrants a year without major changes in culture, living standards and law and order?

How would these new migrants, including families that will follow, be accommodated, given already high levels of unemployment and shortage of housing in many European cities? Without proper accommodation and social acceptance, will there be more terrorist outbreaks and civil strife that disturbs the comfortable lives of Europeans today?

Even as Grexit (the possibility of Greece exiting the eurozone) has quietened down, Brexit (the possibility of Britain exiting the European Union) is becoming a looming nightmare. Whether Britain leaves or not is going to be an expression of how the British people feel about fraternity with Europe. All economic logic seems to suggest that Britain should stay. Germany needs Britain to maintain the balance of power within Europe, because British level-headed diplomacy is a useful counterweight to the more romantic (and less fiscally disciplined) southern members, such as France, Italy and Spain. There is genuine worry that the refugee crisis will make the stoic British more isolationist, preferring fraternity within the British isles.

From an Asian perspective, the stability and prosperity of Europe is an important anchor to global peace and stability. Europe is not only a major trading partner but her moderation and common sense is often a useful counterweight to American exceptionalism, whose mistaken invasion into Iraq triggered the breakdown in the Middle East order. Perhaps the status quo in the Middle East was always fragile, made more fragile by growing population, low oil prices and climate stress.

The borders of the Middle East and Africa were the legacies of the Great Game in the 19th century, when former colonial powers carved up these areas into territories that ignored tribal or geographic realities.

Today, these borders are being ignored by non-state players, and peace and order will not return till we find a solution to creating jobs in situ for the growing youth that are increasingly armed and willing to fight for their rights. Throughout history, it has always been the unemployed and disaffected youth that has led to revolution or war.

China’s One Belt One Road strategy can best be understood as a building of roads, rails and ports to link Eurasia together, creating new trade routes over old historical paths. For the first time, this will be a linking of roads and rail between China and India, and through central Asia, almost into the heart of eurozone, north to Russia and south to Africa. The investment in the infrastructure and in jobs for the young is the best hope to avoid massive social upheaval. This is the 21st Century Great Game – whether to live in fraternity or fratricide.

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

 

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One phone to rule all; Fintech, the healthy disruptors of forex


Software rules: Less than 20 of the iPhone comprises hardware and labour costs. The real profit is in software, which is all about knowledge and mindsets. – Bloomberg

WHO dominates the phone dominates the Internet. The whole world of information is now available in your hand, replacing your own mind as a memory base for instant decision-making.

The reason why traditional bank shares are dropping like a stone is that mobile phone companies and financial technology (FinTech) platforms “get it”. Banks and conventional financial institutions are stuck with so much legacy hardware (branches and outdated mainframes) and complex regulation that their CEOs feel beseiged by bad news – cyberattacks, privacy leakages (like the recent Panama leak), capital requirements and huge fines.

No wonder top bank talent is leaving the industry. In Silicon Valley they get fat bonuses to become “cool” without regulations. Regulated bank CEOs are held personally responsible for everything that goes on in their bank, having to deal with soul-destroying staff and expenditure cuts, on top of their own pay cuts.

I was at the Singapore Forum this month moderating a panel on FinTech when the Alibaba strategist mentioned that the current battle for market share is all about “mindset and handset”. The mindset of the Internet age is that you do not need to own any assets – you simply share or rent them from those who have excess capacity. The mobile handset is where most of the world’s population is moving towards doing business, from dating to buying a house, phone, using your fingerprint and retina as digital signature.

Finance today is an information business and FinTech (see below) can deliver payment services at 1-2 cents per transaction compared with US$10-US$12 per paper-based payment. Increasingly, we spend more on apps and software than on the actual hardware.

Did you know that the fastest adopters of technology in the world are porn, gambling and politics, in that order?

The financial consultants Oliver Wyman have come up with a major report on “Modular Finance”, which argues that technology has transformed finance into modular parts – modular supply (provision of financial services by specialists); modular demand (buying new services from such specialists).

Oliver Wyman’s report begins with a cartoon about a customer buying a house, arranging a mortgage and insurance, selling stocks and wealth products for the downpayment and paying for all fees through a single mobile phone. Equipped with the latest encryption, digital signatures and right apps, the mobile phone has empowered the customer to everything what used to take several visits and weeks to the bank, the lawyer, real estate agent and even land registry to complete the transaction.

In short, the game of finance is being fought by one super-bank to rule them all (Goldmans?) or one phone to rule them all.

The global supermarket model (one brand to rule them all) is having a serious re-think about being labelled G-SIFIs (global systemically important financial regulations), requiring special regulatory attention and additional capital and liquidity requirements. Increasingly, these universal banks do not need to own and supply all services in-house – they simply outsource the back-office or even key services to trusted specialists.

On the other hand, FinTech aims to change our lifestyles through different types of technology. First, frictionless and seamless inter-operability integrates businesses like logistics with payments, such as Alibaba, making it easier to buy, pay and deliver in one pass.

Second, Big Data analytics, which Amazon uses suggest to you what to buy next and understand how customers are changing. Third, Blockchain and Distributed Ledger technology, which makes systems more secure. Fourth, artificial intelligence, such as robo-advisers on investments.

Fifth, data secrecy and unique identity codes that ensures privacy and confidentiality.

FinTech platforms have less staff, less legacy assets, less regulation and more flexible mindsets. These barbarians at the gate are only stopped by regulations that currently protect the banking franchise. This is not to say that they don’t have defects, such as lack of attention to anti-money laundering, terrorist funding and cyberattacks. When they reach super-scale, they are also Too Big to Fail.

The rapid evolution of FinTech means that Asia now has the money and the technology to transform our antiquated financial systems into the 21st century.

The Asian population is young, tech-savvy, mobile and willing to experiment with new services and equipment, which we are creating in Asia. The good news is that if our young startups get it right, the world is their market. The bad news is that if our regulatory and government support services don’t allow our startups to compete, our markets and jobs will be someone else’s lunch.

What is holding back this transformation to FinTech Asia is still mindsets. Look at how Jakarta taxi drivers are protesting against Uber. Regional banks are expanding their footprints by buying the franchises of retreating European and American banks in investment and private banking. But they and their regulators have not thought through how to use FinTech to cut back their legacy systems, many of which are obsolete and operating under-scale, because many regulators still insist on each bank owning and running their own hardware and branches. To be fair, not all regulators think that way.

Barriers to FinTech are sometimes regulatory mindsets. Asian regulators are more willing to accept the entry of financial institutions from outside the region than from their neighbours. Without regulatory concurrence, many banks and financial institutions do not dare to experiment with new technology.

We now have Asian customers moving to global service providers like Apple, Google and Amazon, if Asian financial service providers do not get their act together. Compe-tition is good – look at how Sri Lanka is negotiating with Google to provide balloon-suspended cheap high-speed wifi coverage.

Asian bankers and regulators need to think hard about what Asian customers really want to achieve global scale in terms of efficiency, stability and trust.

FinTech and mobile handsets are not the solution to all our problems, but they will change how the problems are resolved. The real problem is our mindset. Less than 20% of the iPhone comprises hardware and labour costs. The real profit is in software, which is all about knowledge and mindsets.

That belongs to the realm of politics and education, which is another story.

Andrew Sheng writes on global issues from an Asian perspective.

Image for the news result

Fintech, the healthy disruptors of forex

SINCE the global financial crisis of 2008-2009, investment banks have spent much of their time and energy on regulatory compliance, leaving them “on the back foot” innovation wise.

Faced with growing regulatory demands in recent years, investment in new technology has had to take a back seat. This does not come as a surprise given the lack of deals and flows as well as the broad-based decline in commodity prices. That little space innovation wise has been quickly filled by fintech firms.

There are traditional fintech firms that act as ‘facilitators’ (larger incumbent technology firms supporting the financial services sector) and there is emergent fintech firms who are “disruptors” (small, innovative firms disintermediating incumbent financial services firms with new technology).

The fintech space can be further broken down to four major sectors – payments, software, data and analytics and platforms.

In the foreign exchange market environment, a typical trading would include sourcing for the best price either via electronically or via the voice broker.

In Malaysia’s financial market landscape of foreign exchange trading, the wholesale price or in other words interbank market is dominated by investment banks facilitated by money brokers who source the best available price to match foreign exchange trades.

With the wholesale market dominated by firms with deep pockets and ample liquidity, customers are subject to a spread cost, whereby prices they receive naturally takes into account a spread from the screens and a spread from the interbank price as well as a spread that is subject to the credit profile of the customer.

Global fintech firms however are altering this process or at least are gradually making inroads.

These firms provide a platform that offers a comprehensive foreign exchange solutions, including live mid-market exchange rates updated in real-time, customised foreign exchange rate alerts, a fully automated transaction information dashboard, multi-user and multi-subsidiary control panel as well as on-demand forex reports.

The best part is, these firms charge a flat fee of which is detailed before each currency trade with absolutely no additional or hidden fees.

Until recently, SMEs have had little choice in terms of where to go, other than to the banks, but now it seems a different foreign exchange model is emerging in the fintech sector, giving banks a run for their money.

The crux of these business models by fintech firms in the foreign exchange business is service via the use of technology.

The automation of the process, eliminates the middlemen and therefore reducing cost, fintech has enabled companies to be more transparent with their pricing.

In the case of Malaysia, SME’s play a vital role in Malaysia’s economy, with foreign exchange risks increasingly being a volatile variable in their cost structure.

These form of fintech solutions are likely to witness exponential growth, but the cost would be, a gradual erosion of SMEs foreign exchange business that are currently held by our local investment banks.

Fintech firms’ foreign exchange model broadly encompasses four major steps, namely, the SME firm carries out their foreign exchange transaction by selecting the currency, the amount, delivery date and beneficiary account and confirm the exchange rate.

Once this is done, the next step is, the SME firm sends the fund to the fintech firm whereby the fund is segregated and held in a local bank.

Bear in mind these funds don’t form the part of the assets of the fintech firm and are held separately to ensure full client fund security at all times.

The third step is, the fintech firm’s matching engine will proceed to the exchange, matching the SME firm’s fund with another company or through the wholesale foreign exchange market.

Throughout the process, the SME firm is provided full transparency on prices, giving the SME firm the liberty to be fully in control.

Once the trade is matched, the funds are sent to the chosen beneficiary account of the SME firm, either its own, a subsidiary or directly to its supplier.

A four-step approach that uses the middle rate of the foreign exchange, removes the so called spread cost that is usually charged by banks to these SME firms and finally gives full transparency on the whole process itself.

With the clout and importance of these fintech firms, the Monetary Authority of Singapore recently announced the formation of a new FinTech & Innovation Group (FTIG) within its organisation structure.

FTIG will be responsible for regulatory policies and development strategies to facilitate the use of technology and innovation to better manage risks, enhance efficiency, and strengthen competitiveness in the financial sector. The upcoming Singapore FinTech Festival, to be held in Singapore from Nov 14 to Nov 18 will be an event to watch.

Organised in partnership with the Association of Banks in Singapore, the week-long event, which is the first of its kind in Asia will bring together a series of distinct, back-to-back fintech events.

Bottom-line, Malaysia’s financial sector, in particular its foreign exchange market needs vibrancy and fintech firms are likely to add spice to the local foreign exchange market, aside from creating value added business processes and technology intensive jobs, it would provide a healthy competition to the local investment banking scene.

Suresh Ramanathan believes gone are the days when foreign exchange trading was noisy, loud and unruly. It’s more about savvy technology driven trading. He can be contacted at skrasta70@hotmail.com

By Suresh Ramanathan Currency Insights.

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Is FinTech Forcing Banking to a Tipping Point? “To survive, banks will be compelled to embrace many of the FinTech innovations …

 

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Exchange rates | Rightways

Modern finance and money being managed like a Ponzi scheme !


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.

Remembering the legacy of Bandung, Sandakan death and Hiroshima bombing


THIS year marks the 60th anniversary of the historic Bandung Conference
and the 70th Anniversary of the end of the Second World War.
 A copy of the final “atomic bomb” leaflet, I think? I don’t read Japanese, but this was attached to the above memo. If you do read Japanese, I’d love a translation. Please ignore my thumb in the corner — it’s hard to photograph documents that are bound like these ones were.  http://blog.nuclearsecrecy.com/2013/04/26/a-day-too-late/

In order to commemorate the past, a series of conferences and events have been held, the most recent being the Afro-Asian Conference hosted by Indonesia President Jokowi this week. The first Bandung Conference was called by the first Indonesia President Sukarno in April 1955 among newly independent Asian and African nations, beginning what was later known as the Non-Aligned Movement against colonialism. Twenty-nine countries participated, representing 1.5 billion people or just over half of the world’s population. It was the first time that leaders of these countries met to discuss their future after the end of colonialism.

The conference was historic because it was attended not only by Indian Prime Minister Jawaharlal Nehru, but also Egyptian President Gamal Nasser, Chinese Premier Zhou Enlai, Muhammad Ali Jinnah of Pakistan, U Nu of Burma, Nkrumah of Ghana and Tito of Yugoslavia, all giants not only in their countries, but makers of history in the 20th century.

The United States did not attend because it was not sure whether it sided with the European colonial powers or its new role as an ex-colony liberating the world.

The Bandung Conference was a conference of hope that the newly independent nations would build themselves into a zone of peace, prosperity and stability. On the whole, despite some failures, they succeeded. By 2013, these countries together have a GDP of US$21.2 trillion or 28.1% of world GDP, significantly improved compared with their share of less than one-fifth of world GDP in 1955.

Aug 6, 2015 will also mark the 70th anniversary of the horrific atomic bombing of Hiroshima, which led to the end of World War Two on the Pacific side.

Lest we forget, World War Two was a horrific period, since the world lost between 50 million and 80 million people or 3% of world population. Japan lost 2-3 million during that war, but the rest of Asia suffered estimated losses of up to 10 times that number.

Even though memories are fading, there is still a generation who remembered the hardships and atrocies of war, from personal experience of family being killed, bombed or flight as refugees. Even a remote country like Australia could not escape that war. Australian soldiers fought heroically in Kokoda Trail to repell the Japanese invasion of Papua New Guinea in 1942. If not stopped, Australia could have fallen to Japanese hands, changing the course of history.

Image result for sandakan death marchBut the 625 Australian deaths defending the Kokoda Trail paled in comparison to the Sandakan Death March, in which 2,345 Australian prisoners of war died marching from their prisoner of war camp in Sandakan across primitive jungle in Sabah. Only six Australians survived those marches in early 1945, only because they escaped. One in 12 of every Australian who perished in the war died in that death march.

My impressions of this incident are indelible, growing up in Sandakan and following the trail across Sabah on a road built by the Australians to commemorate their dead. It fascinated me that man could be that cruel to other human beings to send them across the virgin jungle without food to certain death.

On June 9, 2014, when Japanese Prime Minister Shintaro Abe addressed the Australian parliament, he did mention Kokoda and Sandakan. In it, he did not offer an apology, but he did sent his “most sincere condolences towards the many souls who lost their lives.” This was very Japanese English, because one gives condolences to the living, not the dead.

Image result for Hitler's Abe imagesIn the Afro-Asian Conference this week in Bandung, he rephrased his words as follows, “Japan, with feelings of deep remorse over the past war, made a pledge to remain a nation always adhering to those very principles (of Bandung) throughout, no matter what the circumstances.”

We note that he is already shifting the official Japanese view on the war from his predecessors Murayama and Koizumi, who offered “deep remorse and heartfelt apology,” in their statements about the war in the 1995 and 2005 anniversaries respectively.

I always thought that the difference between remorse and shame is one that differentiates Western and Asian values. A remorse is a feeling of regret that something has happened but there is no sense of guilt. Shame is a feeling you have injured someone else and you feel guity about it, and you want to make amends.

There is a sharp difference between the German and Japanese attitudes. Seventy years after the war, the German courts are going to try the 93-year old “bookkeeper of Auschwitz”, whereas the Japanese are still revising their history books on what really happened.

What makes Abe’s “deep remorse” poignant is that he is a leader of a faction that wants to re-arm Japan by changing its constitution and he regularly visited or sent ritual offerings to the Yasukuni shrine, which contains the shrines for 14 class A war criminals. Even the Japanese emperor has not visited Yasukuni after these enshrinements.

Most Asians like myself have great respect for Japan, but feel uneasy that the Japanese are beginning to whitewash their role in the war. The Yasukuni shrine has an accompanying museum that seems to suggest not only that the Nanking massacre did not occur, but that US actions to deny Japan energy resources pushed it into war. But these do not explain why Japan invaded China in 1937.

On the commemoration of the 70th anniversary of the end of the Pacific War, will the US leader express an apology or remorse for bombing Nagasaki or Hiroshima? If the Japanese want to understand how the rest of Asia feels about its actions during World War Two, just changing the history book will not solve the deep sense of injustice that war brought to the region. Could those who died or suffered during that period appeal to the rule of law that Abe-san so proudly proclaim today?

All of us want to move on, but not through denying the past. As the philosopher Santayana said, those who cannot remember the past are condemned to repeat it.

Think Asian by Andrew Sheng

 President of Fung Global Institute
http://ineteconomics.org/people/andrew-sheng
Sheng is Malaysian Chinese. He grew up in British North Borneo (todaySabah, Malaysia). He left Malaysia in 1965 to attend the University ofBristol in England, where he studied economics.

Datuk Seri Panglima Andrew Sheng (born 1946) is a Distinguished Fellow of Fung Global Institute, a Hong Kong based global think tank. He started his career as an accountant. He served as Chairman of the Hong Kong Securities and Futures Commission (SFC) before his replacement by Martin Wheatley in 2005.

THE AUTHOR IS CHIEF ADVISOR TO THE CHINA BANKING REGULATORY COMMISSION, A MEMBER OF THE BOARD OF MALAYSIA’S KAZANAH NASIONAL BHD AND A MEMBER OF THE INTERNATIONAL ADVISORY PANEL TO THE AUSTRALIAN TREASURY’S FINANCIAL SYSTEM INQUIRY

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