US Consumer Close Watch: What to Hope for 2010

As usual, nearing holiday season is people's, or economists', period of a close watch. This period of November to December is when consumers usually spend their money for the upcoming holidays, Christmas and New Year. The consumer spending for year end holiday is crucial, for the fact that it can be a starting point of analysis for the following year's economy. What happens in the US certainly can represent the overall worldwide economy movement and by that, businesses in the rest of the world can decide what to do for the following year, in this case, 2010. Let's see how it is.

Potential Downturn
The so called global crisis that was centered and initiated in the US market clearly made its way to hold some upturns. Job market was hit first as many layoffs took place. This indicates a tendency of less consumption by consumers, or at least most people consider whether it is wise to spend more this year end. On the other hand, the recently announced rescheduling of Dubai World's debt creates another indication of a downturn, since many of Dubai World creditors are institutional US investors or financial institutions. Most of these institutions, of course, lay good hopes for Dubai World's debt settlement. Possibly too many spending plans have been set ready for implementation in 2010. And the announcement, despite the uncertain probable salvation by Abu Dhabi, really didn't make their week. So it's an even more strict budget for the investors a year ahead.

However, consumer spending is the most important factor to estimate the probable future profile of the economy, more crucial than what is being faced by the institutional investors for Dubai World. Retail sector is where the real economy movements happen. They move in a systematic way that operates businesses in the real sector. High volume in this sector means a rational hope for fixing our expectation to a better state. And that is where consumer behavior takes its role. Consumers can change their consideration of spending so long as there is a reason to do so. There is still a hope for avoiding any potential downturn.

It's What the Companies Do That Counts
It's true. You'll never see yourself buy a good present without discounts in this time of year. So this is the time where companies should adjust their business strategy. Focus on operational turnovers, put forth a generous promotion, and cut prices. These will certainly divert consumers preference of spending and result in sales. Companies need to make consumers see why they should spend this year end. After all, the holidays are the most wonderful times of the whole year, something too good to miss. It's the default mindset the people have. Get rid of other constraints that blocks this default mindset into effect.

Build a powerful promotion along with a carefully planned marketing strategy to make a strong holiday season. We need to have a good holiday to keep everything going. If this is happening, then it will bring a chain reaction as it helps the production/manufacture sector, distribution sector, and many others to strengthen the economy, at least for finishing 2009 and looking up at 2010. 1st quarter of 2010 will be very much depending on how the companies conduct their campaign this year end.

Why US Market Matters
The reason why the world needs to pay a close attention on US consumer market is this, it's the downstream area of the biggest economy in the world. Many US companies produce goods with help from their counterparts worldwide. Outsourcing has become a new trend since several decades ago. That means, increasing volume in US retail market means increasing sales for many companies outside the US that export their goods to US-resided companies.

Not only that. Retail sector is the estuary of all businesses. Almost every business model will eventually reside in retail, since at the end their goods and/or services will meet their end customers. More over, retail sector pulls over so many other sectors that help deliver goods and/or services to end users. Manufacturing, distribution/transportation, telecommunications, and sometimes banking, all take part in retail sector movements. By having all these, retail volume will certainly roughly reflect how other sectors perform. Imagine if among all those players in retail support sectors reside companies from around the world. It's just too big to fail.

Rational Hope
After seeing the above description, it is clear. There is indeed some conditional hope that the US economy will enter 2010 in a not-so-worrying state of mind. And this is subject to how companies in this end point of 2009 conduct their strategy. If they can come up with a clever and dandy measures, we may be able to predict that economic downturn is not yet to come, for the US and the rest of the world.

(Picture sources: www.msnbcmedia.msn.com, www.usm.edu, blog.nielsen.com).

How IS/LM is Irrelevant

It is said that when there is a predetermined return based on interest rates in an economy, there will always be Classical Dichotomy. Classical Dichotomy appears as the manifestation of modern economy where anything is salable, including derivatives. It shows the separation of market into real sector and monetary (financial) sector as a consequence of the existence of interest rates. With the existence of interest rates, these two markets theoretically move independently. Even sometimes when the real sector is devastated, monetary sector can survive. There is a belief in the monetary sector that when prices are fluctuated and volatile, the market is getting more and more interesting. And this particular condition, in turn, shall ruin the economy of a developing country.

Classical Dichotomy is seen in the IS-LM model. In 1936/37, an economist named Sir John Hicks invented the IS-LM model which tells about the equilibrium of money market and goods and services market, symbolized by the crossing of both IS and LM curves where the X axis represents the goods and services market (the real sector) and the Y axis represents the money market (the monetary sector). In other words, the horizontal axis real sector represents the national income or the GDP and the vertical axis monetary sector represents interest rates.

In that first quadrant of the Cartecius diagram, there are two curves that intersect each other at the point that designates the equilibrium point of both markets in a Classical Dichotomy condition. The upward sloping curve is the LM curve, where the initials stand for "Liquidity preference/Money supply equilibrium." And the other one, IS, has the initials standing for "Investments/Saving equilibrium." As a whole, this model is mostly seen by modern macro economists as being at best a first approximation for understanding the real world. But is it true?

The slope of both curves is influenced by interest rates. However, both don't correspond to the same rate. The IS curve tends to use credit rate and the LM curve tends to use saving rate as its corresponding rate. By simple logic we can say that when Classical Dichotomy is present, there will never be a condition where credit rate equals saving rate because if that happens then intermediaries will not receive spread profit. This is unacceptable since most financial institutions rely on this type of earning. Therefore, when there is a Classical Dichotomy condition, IS and LM will never cross each other. There will never be an intersection between the two and consequently there is no equilibrium between money market and goods market, or the monetary sector and the real sector.

Another approach on actualizing the model is through the Loan Fund Supply paradigm. In this paradigm, economist Joseph E. Stiglitz provides the view that the LM curve is considered to represents the movement pattern of loan funds or funds that are to be distributed from the surplus sector to deficit sector. Accordingly, the curve will cross the IS curve in time since both correspond to the same rate, which is credit rate. However, this condition is still not able to reflect the real situation in the real world. It is true that the IS and LM curve is able to cross each other because they both move according to the movement of credit rate. But the thing is, the investors are getting return based on saving rate, which tends to be lower than credit rate. Therefore, the real movement pattern of LM will never be reflected if the curve is considered to be corresponded to credit rate. By nature, the position of the LM curve is supposed to be below the IS curve. And supposedly also, they appear in two different Cartecius diagram.

Another proof showing that IS & LM meet no equilibrium is shown by the fact that the transaction volume in monetary sector amounts USD 1.6 trillion per day and that of the real sector is USD 6 trillion per year. Is there any equilibrium? In this case, does the IS/LM is actually able to reflect or approximate the real world? Well, I don't think so. But on the other hand, I want to understand the argument opposing this theory.

Anyone, please?

Image source: www.personal.psu.edu

Economy Growth Watch-Out: "Cicak-Buaya" Against Indonesian Economy

Indonesia's current flagship case, the Corruption Repellent Commission (KPK) versus the Police Department, has become a serious threat to the nation's economy growth. Chairman of the Indonesian Businessmen Association (APINDO), Sofyan Wanandi, stated that there are potentially hundreds of millions or even billions of dollars of worldwide investment funds detained because of the potential uncertainty seen through the slow and probable failure of law enforcement. For this matter, why should Indonesian worry about the fact?

Indonesian need to worry very much about that because if investment commitment is detained then real sector expansion will reduce its speed. Indonesia can not have this. What we need right now is economic growth catalyst. This condition of uncertainty indicated by the flagship case, on the other hand, is given more negative supports if foreign investment funds would rather choose a much saver alternative, the Indonesian Treasury Bond, SUN. After all, Indonesia is still to big a potential to turn head from. Imagine a 200-million-people market.

The bond, by system of course, will eventually be used to fund the nation for any purpose. But the impact will not be quick and specific to the expansion of industries. As we all know, industry expansion brings a tremendous multiplier effect, namely increasing the dynamics of economic activities with a large scale in general, increasing productivity and providing an increasing purchasing power for the people. At the end of the day, we will see a growing economy through a dandy incline of GDP.

Constraint to Growth
Now, the reason why this matter can get the nation to something bad economically is because Indonesia is starving for development funds to finance its real sector. GDP is moving quite decently for the last three quarters of 2009. For some reason, this shows that there is a good hope for the economy's upturn. And that is exactly why Indonesia mustn't face another decline. A good performance does not necessarily show stability. Stability plays its own game based on economy pillars a nation can stand on, like policies and infrastructure. We have seen how the infrastructure in Indonesia brings about the high cost economy therefore the only hope for economy upturn movement is burdened on the shoulders of policymakers and enforcers. This means bureaucracy. If this last resort is too short to lay hope on due to thick corruption tendencies, then from the investment point of view Indonesia's only profitable alternative is the Treasury bond, which provides very little effect to concrete changes in real sector. And no concrete changes means no movements for the economic growth.

What to Do
Indonesia needs to implement strict measures when it comes to law enforcement, especially for this flagship case. Not only does this will bring settlement from the law perspective, and thus bring Indonesia a better face, but also give more certainty with regards to investment climate. Failed to do so will only bring a worse emotional and psychological effect toward the government. People will see an indecent display of law enforcement and in turn shall lose their trusts toward the law enforcer. This is not what foreign investors want to see, and clearly not what Indonesia needs to grow its economy.