Wednesday, June 25, 2008

The Price Mechanism or Ghost

Many people have in the past lauded the price mechanism for being the correct road to prosperity. China benefited tremendously from FDIs flows ostensibly to tap its large virgin domestic market, but ended up exporting cheap products, as the children of poor peasants flooded to the coast to earn few dollars by sweating in crowded factories, with sufficient wages to buy a handphone and go home once a year. China's persistent double-digit growth sets the stage for the global markets to fly, fast forwarded by the hedge funds, with hands full of useless US dollars to throw them away. Metal and commodity prices soar.

High commodity prices are in fact a global battle for scarce resources. Either more of the precious environment is destroyed or the poor starve. It is right for the government to put cash into the hands of the poor so that they do not go so hungry.

But the panic at the petrol kiosks is not about the price hike, but no petrol from strikes by petrol stations. People will pay for necessities, in order to get on with their daily lives, but they must consume less elsewhere.

The loss of welfare by people in countries such as Malaysia despite its good economic growth year after year is the poor quality of that economic growth which has failed to increase the income all round in real terms. FDIs create jobs but the wages are much smaller than their total revenue. Mega projects engender huge leakages in capital outflows through import of machinery and "payment for consultancy services." Asset inflation keeps people pre-occupied. Higher property prices allow them to borrow more and "invest more" in property as well as stocks. A rise in the interest rate will hurt many of these people. That the current inflation is imported rather than demand pushed, as per the conventional wisdom of officials espoused in the media, confirms the poor quality of our economic growth as we did not share in that general prosperity which have led to the increase in demand for commodities worldwide. Worse, the currency is happily kept undervalued to accentuate the export earnings of commodity exporters while the rest of the country suffer higher imported prices.

The price mechanism in the market economy works even in this case; the ordinary men and women and children must tighten their belts because of higher prices so that the commodities will be consumed by people wtih money in other countries. Moonlighting with new hawker licenses may not help. Now wonder the people are angry and the government is worried. The ghost of past misdeeds, indeed.


ben said...

With your take of Msian economic growth quality, all the more, the shallow planning of the fuel hike is outrageous. It reminds of me of a child who would ask the parent what the red button(emergency button) in train. At least, the child consulted the parent before he does anything stupid. As far the fuel hike (the quantum) is concerned, I have much doubt that the govt ever consulted the experts. If they had, then the experts would probably have bought their qualification.

My take is that in the few months ahead, financial insitutions with heavy hp porfolio and credit cards will be badly affected. Those hp with Proton/Perodua cars where their loan is 100% are the highest risks. With the govt encouraging civil servants to look for part time job, it's basically sending the message "WE CAN'T HELP YOU, YOU ARE ON YOUR OWN".

Enjoyed reading your snippets!

etheorist said...

Thanks, Ben.

There will be a series of adjustments in the economy, as a result of the fuel hike. At the end of the day, there will be less actual consumption as the real purchasing power has been reduced. This adjustment will be made by the poor.

If interest rates are raised, financial insitutions will be the next to take the hit. That is why the central bank is reluctant.

ben said...

Just another thought to quicken the bursting of commodity bubble.

US has go to into recession ie Fed will have to increase the interest rate which will boost the dollar and reducing the demand. That in turn will slow down the export from China, India, etc. That's the price for living in cheap fund for far too long. Recession is a good detox for them instead of bailouts which they've been preaching to us during the 98 crisis.

One of the reasons for the commodity boom is due to the weak dollar. Besides demand of China and India, other is the hedge fund flushed with cheap funds. This in turn is fuelling the commodity boom.

It's like the stock market, when the market is on uptrend, those with margin accounts make lots of paper money. But the reverse is true.

What say etheorist ?