Monday, March 3, 2014

Galloping Prices

I suppose we must get used to living with higher and higher prices. Inflation seems to be here to stay and we are now happily forming what economists call "the inflationary expectations". We have many clever people telling that higher prices are normal and consistent with the monetary base and the interest rates and the income level. Of course, everything is consistent with everything else. If we squeeze a goose by the neck, that the face of the goose is red is consistent with the restriction to its neck.

Inflation, and expected inflation, is excellent for speculators. Expected inflation makes speculators look like heroes and prophets and expert investors. There are now countless happy speculators of vacant property lots who imagined themselves to be millionaires when they look at brick and mortars and ignore the debts they have accumulated. With fools like them also all the times, these millionaires look like a sure thing, so long that their expectations on inflation is sustained. Banks and property developers have colluded to produce an asset inflationary situation which everyone hopes is not a bubble so long as locals can over-extend themselves on credit and foreigners can be induced to add pressure to the demand. Banks deliberately fool themselves into thinking that real estate is solid collateral for loans and if a customer defaults, the bank can always get back the money by forced selling the property. This is okay with one property; but if it is the whole sector, then we are talking bank bankruptcy. Banks should be asked to keep sufficient reserves with respect to their loan portfolio, rather than paying their executives huge bonuses based on accrued and future incomes.

Inflation creates poverty among those with fixed borderline incomes. It is okay for the rich guys to brush aside prices which have doubled on the normal essentials they consume. Of course, in the end, everybody will make ends meet by hook or by crook, and this may mean for some that they may literally have to eat grass to stay their hunger and survive the day. The market is cruel. Price adjustments work because it is impersonal. No money, no deal and hence no food. Higher prices mean there is greater competition for food and those with no money goes hungry. Price adjustment is rationing in a market-oriented way - there is no one person to blame.

We have a clever government who happily after the elections release all the caps on prices just because the government itself is overspending. The government continues to indulge in huge projects. Cutting subsidies on fuel to zero is one of the most dangerous idea that the government can entertain. It pretends to market efficient but it creates social hardship and hence unrest. Fuel subsidy comes from this idea that this country has oil and gas which should be sold at the world market price and then using the proceeds to help the nation and the people. Instead, the government spends it all on itself. So because the oil money is coming in short, it is imposing a tax on every transaction in the economy. This silly little tax idea that has been in the textbooks for so long that everybody seems to have forgotten what it is all about. You don't tax income because you want to encourage entrepreneurship. You tax consumption because you want to discourage it. But if go back to the Keynesian paradigm where you gladly decry the silliness of saving and applaud consumption because it generates demand that keep up employment, then I think we all economists are getting our knickers twisted. We are simply giving out mixed signals to the people.

I am happy with GST if the government abolishes all other form of taxes - income taxes, import duties, withholding taxes on savings, etc. Afterall, there is no tax on gains from stock market speculation. Just concentrate on GST and make it efficient. This will reduce the size of the government, and cut expenses.

After the price increases and the confusion of the GST implementation, we shall happily suffer from a depression. I think the government should watch out on this. You cannot get out of this by announcing more mega projects. You just have to set the local environment right for industries, for the small inventors and the entrepreneurs (no, not the traders and carpet baggers). You have to rebuild the basic economic infrastructure. You have to get the banks and the businesses to serve the local communities. Globalisation has got us all to think global in general and no one local in particular.


walla said...

If you ask anyone how GST will affect his business, he will say it will be completely passed on to the next guy whether downline or customer.

However this assumption of market linearity masks the question whether there won't be any non-linear effect in which suppliers will raise their prices above GST because they expect others to do so in a way which will ultimately affect their own margins.

If and when this happens, all corners of commerce will inflate which will distort valuation that underpins real productivity.

If that's not bad enough, there's the other matter of who will be providing the platform for online processing of GST.

For this, there has been at least two online precedents. The AES traffic summons and the healthcare insurance scheme.

While the latter collapsed at the proposal stage, the former was on the verge of being implemented when public outcry caused it to be withdrawn but now with a rm400 million bailout using public money by the present government.

Just as people will wonder how a figure of rm100 million was arrived at in stopping the crooked bridge project, people will wonder how the figure of rm400 million was arrived at in bailing out two juvenile companies which have never had any past performance of doing the AES. Certainly, it's inconceivable their equipment installed would cost that much. Therefore the sum asked, and given without transparency, must have included potential business lost or other charges. This is exactly the same cavalier approach used to approve the concessions for tolled highways, electricity, water and sewerage.

It's the same modus operandi - corruptly privatize profits for political cronies to propagate power holding, then socialize losses back to the citizens who are made pliant by handouts to believe the present government is progressive, doing a good job and necessary to maintain social stability even when it is the one destabilizing society by financing NGO chauvinists and charlatans, again with public money.

The inalienable conclusion one can draw is that the present government has never rolled out any sustainable policy or connected one to reality on the ground in a global context, all the more critical because the lines of globalization are themselves being redrawn by changes worldwide in commerce, industry and social reform.

A simple example is the desired profile of this country. Is it Muslim just because one religion is made official? Even this has an effect on something as mundane as the agricultural sector.

Commodities from plantations are a backbone employer and mainstay revenue for the country. There is a dire shortage of experienced foreign workers in critical tasks like harvesting. They are being coaxed back to work in their own home country which is fast developing its plantations to compete with ours.

Because of the shortage, productivity here is low, losses are high, wage pressure is increasing, and social ills are rising.

But the government does not allow non-Muslim foreign workers from say Myanmar or even China to come in to work which would have mitigated the problem quickly and decisively.

Therefore beyond rebuilding basic economic infrastructure is the challenge of changing the mindset that this country must have a specific profile prejudiced by the policy-makers who themselves cannot furnish one cogent logical reason to support how maintaining a particular ethno-centricity will lift productivity, create jobs, expand enterprises, multiply value and develop this country sustainably.

Does anyone think if things such as this continue there will miraculously be a happy ending, especially when weak education can't grow the services sector that is made to replace at the same time the manufacturing sector which has hollowed out.

So without agriculture, manufacturing and services, how can the future not dim when mining is going to be resource-depleted by the day?

Meanwhile they run amok with your money and your sanity while threatening not to be provoked.


walla said...

James said...


Thanks for the reading.

Most of the links seem to go to the same web page on the WB theory on market efficiencies.

One question not related o the subject of galloping prices...if you care to answer.

How do you go about comparing different standards of living in different places?

Say, I want to know how to compare the average standard of living of someone living in a far flung US island, versus someone living in Washington DC.

How would you go about doing an economic analysis?

How long would it take you do such an analysis?

What would it take do so such an analysis?

Appreciate your thoughts and comments.

As always, I enjoy your recommended readings..

hishamh said...


This might come a little late, but the UN runs a Center for International Comparisons, hosted by UPenn:

The associated Penn World Tables database tries to provide a common benchmark for comparing living standards (specifically income per capita) across the world, and is often used in economic research.