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.