A Shocking Revelation of Our Terms of Trade

Economists and governments are in their nature always good at confusing people. We are given the impression that we are trade-surplus nation, net oil exporters, beneficiary of rising commodity prices, and that means Malaysians are having a positive terms of trade. So, no worry because Malaysians are better off than rest of the world. To government, we as the ordinary citizens can still take pains from their nonsense.

For those not familiar with the term, a nation’s terms of trade is the ratio of what it must give up to get what it imports. The easiest way to understand this, at least for me, is to think of the number of hours of work necessary that you and I to have in order to buy anything of the desire, and in this case, I refer to a barrel of oil.

Misery is as misery does. We are now working more hours for the same barrel of oil. Talk to taxi drivers, middle income group earning less than RM3,000 per month, and pensioners to get a good feel what it means by negative real terms of trade shocks. Put differently, you are less rich, and if not worse still, you are poorer than you before oil prices took off.

Be warn - this time, don’t expect that there is escaping collateral adjustments of temporarily higher inflation and temporarily lower growth and employment.

Next – you should ask how this pain should be apportioned as the misery index rising to be translated into lower real wages and profits. That simple, and that painful. Logically, it also means negative short term interest rates – the rate of return on your money.

But you may retort – what if Bank Negara comes to rescue and that would one be essentially argues that we are operating in a world of perfectly indexed prices and wages. Are we?

The biggest surprise, if you are still not be awaken yet, is that we are likely to experience more nasty asset price deflation rather than the fat tail of acceleration of inflation, unless we are allowing greater adjustment to our wages. Otherwise, Bank Negara may have to tolerate higher headline inflation in the wake of a negative term of trade shock. If it decided to be a ‘hero’, it will create an even bigger mess, and I think Bank Negara understands these exigencies. It doesn’t means that Bank Negara won’t or shouldn’t rhetorically sound tough at times.

Bottom line – this means, my friends, that low, even negative real short-term interest rates are here to stay for a considerable period. Yes, I know that may believe that it is somehow sinful or immoral to hold nominal short rates so low. Sorry guys, CASH IS NOT KING!