Prologue : Some History

one needs to learn History not because it highlights the life and times of previous winners and losers but because it gives us a glimpse of what happened when things were not smooth going. Today, yet again, many things are not smooth going in the world at large. We seem to be entering into a world of uncertainty- for want of a better word.

In the early 40’s here in(then) Malaya, many  local malayans were caught unawares when the world at large started going to war but in those early days of WW2 they were at first happy, because  the war increased demand for Rubber and Tin and it meant higher prices for all commodities. There was a mini boom time here in the peninsula.

This happiness was short lived however as in a matter of a few years later (between  1940-1943) the japs landed in Malaya and the unthinkable happen…the British overlords ran away with their tails tucked between their legs.

Even then, some were still happy because they were lead to believe that the Japanese came to free Malayans from the grip of the orang putih. (years later some of these poor mislead souls were named tali barut jepun-a severe curse on them and their families)

Thus it was that because of ideology and politics, the simple citizens of Malaya fell victim to imperialistic Japanese Army Overlords.  The Japs first job was to take over the administration of Malaya and seize the assets of the state.

Next,the citizens were conned and later forced into exchanging their Straits Dollar and golds, silver for worthless Banana Dollars and promissory notes printed by the Japanese war office. Many had their houses and property confiscated in the name of the Japanese Emperor.

Needless to say, the simple but safe and secure life these people knew came to an abrupt end simply because they had no idea what the hell was happening outside their own safe estates,town and villages.

An entire generation of humans suffered and lost because of politics and ideology and because…. most people did not understand what was going on around them, nor were they bothered to find out.

This was the result of the British overlord’s 200 year old rule of “Don’t do as I do but do as I tell you ”.

Fast forward 71 years later, things have not seem to have changed much. Today the new overlords of the Malaysian people are those we call the” Moneyed People”. Theirs is the world of spread sheets and balance records within the hallowed corridors of mansion like opulent offices in the sky.

The reality of all this is that the developed world, (and recently China), have been stoking growth with debt, and have been doing so for a very long time. As practically everybody can quickly work out, increasing your debts at 2x the rate of your income eventually puts you in the poor house.

But somehow, this math escaped the economists and policy makers as a problem.

Well, turns out it is. And it’s now knocking loudly on the world’s door. The deflation monster has arrived. And now, even in this new  world of Finance, the earth is shattering under their feet as today, most central bank policy makers, investors, and analysts around the world today are gripped by the worry of declining growth rates, dwindling international commodity prices, high unemployment, and other macroeconomic figures.

Previously, not many have given much consideration to this one economic factor that has the potential to disrupt global economies, shut down economic activities, and become a catalyst for a worldwide depression. 

The very same effect our Malayan fore fathers experienced after the British left in early 50’s.

We are talking about 'deflation' that if not tamed, could bring global economies to their knees creating a worldwide chaos never seen before in scale or length. Deflation is a state of economics when prices drop or rather, expectations of prices going down come into vogue.

So what does that translate into?

Firstly, consumption. Consumer expenditure drops as consumers buy and consume hand to mouth. All expenses become capped as people see saving as a better means to appreciate value vs consumption...eg buying a car or house. When someone expects prices to drop, they don't buy. Everyone keeps on waiting for prices to keep dropping. This robs the economy of demand.

Less demand leads to less production, and lesser growth.  This effect pans out over the longer term….where national savings rate increases but retail consumption decreases...a very good example is Japan where household savings are the highest in the developed world.

In the short term, deflation raises real costs to do business by raising real interest rates. If a firm borrows at say 10% in a deflationary economy, say deflation is 2%...the real interest turns out to be 12%. This is a huge number, when expecting lesser demand. Hence firms defer investment, leading to lesser production, lesser jobs etc. Thus in the short term, deflation crowds out private investment.

The clear and present danger today is that very soon Europe will turn the Japanese way: that is, it will slip inexorably into deflation, that by the time the central bankers finally decide to loosen up it will be too late.

The domino effect then takes place..with the US, China and the rest of the world following suit soon after.

What this means to the lay man is that his sweat and tears in collecting a safe pension for him and his plans for the safety and future of his family would be disrupted by forces outside of the laymen’s control i.e. currency devaluation, low interest rates , raging inflation in food prices and high deflationary actions in asset prices.

Did you know this?