Curbing inflation with inflationary policy

By Medecci Lineil

“The experience with which the sciences of human action have to deal is always an experience of complex phenomena…We are never in a position to observe the change in one element only, all other conditions of the event being equal to a case in which the element concerned did not change” Ludwig von Mises, Human Action: A Treatise on Economics, 1949

To recap, the real cause of inflation is defined an increase in quantity of money by government which later creating effects such as cost push inflation, wage cost inflation and the velocity of money doctrine.

Given the knowledge of causation and effects of inflation, I strongly believe the only way to address inflation effectively is to abolish the government and Bank Negara and allow the market to reestablish the monetary system.

If the people do not question the causation of inflation, that is the government of the day regardless Barisan Nasional and Pakatan Rakyat, then the people should be willing to accept all the consequences of the undue increase in the quantity of money which these consequences go far beyond rising prices.

Technically speaking, the power to increase the quantity of money makes it impossible for government to go bankrupts. The government will always have money to pay its debts no matter how large its debt becomes.

With this power also, the government spending is not constrained by tax revenues. So this results with deficits in the government’s budget. Spending more than earning. In order to keep spending, government has to finance the deficits by the creation of new and additional money i.e increase the quantity of money in the market. Spending increases everywhere. Then comes rising prices.

Not surprisingly, as a result of increasing in quantity of money, there is an increase in tax revenues as reported by Lembaga Hasil Dalam Negeri and Kastam Diraja Malaysia every year. The money of the people also increased by the inflation.

In the absence of this power i.e money issuing authorities, the government spending would be constrained by tax revenues because a policy of deficits and mounting national debts would drive the government into visible bankruptcy.

Deficits and inflation are the cornerstone of the welfare state. In the welfare state, everything is free and the government can pay for endless welfare state programs, throughout many government agencies including setting up new agencies such as Kedai Rakyat 1Malaysia, Kedai Ikan 1Malaysia, PR1MA, Klinik 1Malaysia, Ministers salaries, civil servants salaries without constrained by tax revenues or bankruptcy.

As a result, we have seen the monster in size of the government over the years. Rising prices that results from the increase in quantity of money. And yet the solutions are that the government must provide more free benefits.

I also hear a lot of complaints that prices of milk, fish, chicken, vegetables and more have gone up. Now let me analyze the reaction of government by using milk as an example. Consequently, the government declares a fixed price for milk, a price that is lower than the market price would be.

Now Hasan Malek says “We government has done everything needed to make sure our people can buy milk and drink milk” What happens next is the lower price of milk increases the demand for milk. More people can buy and drink milk.

For producers, they have to produce milk at a higher cost while the marginal producers are now suffering losses. So, the pattern of production has changed to sell cows for slaughter house instead of butter, infant formula, yakult, yogurt and cheese.

In the long run, the baby are getting less milk. Now, Hasan Malek asks the milk producers “Why do you not produce the same amount of milk you produced before?” Then, he gets the answer “We cannot, since the cost of production are higher than the price you established. We sell higher price we go to jail under Anti Profit Act”

Then later, Hasan Malek announces “We will apply the same control to infant formula. I will determine a price for infant formula and the mothers across the country will be able to feed their babies at a lower price. Rakyat Didahulukan”

What happens now? The same story repeats itself with infant formula, the production of infant formula drops and the government is again faced with a dilemma. So Hasan Malek arranges new meeting to find out what is wrong with the production of infant formula and get the same answer he heard from milk producers.

This is why I oppose every effort by government dealing with inflation issues. It is simply meaningless. To intervene is leading more chaos in market.

Inflation destroys the motivation of saving in life insurance policies, savings accounts, deposits etc because its turns these savings upside down. They are meaningless because the value of money totally at the mercy of government officials and politicians. Thinking over the declining value of money that depends on the increase in quantity of money, this is really alarming situation.

And to the extent as I highlighted earlier in previous article, the people act desperately to save money in gold investment, Genneva. The government and Bank Negara’s inflationary policy lead people into taking more risk with their savings that they should. One time I read “That’s why most of us are in Genneva, because there’s no place else to go”

The government prevented ten of thousand investors from saving in gold (refer Geneva), thus destroyed the benefit they could obtain from saving, this would deprive their motivation to work or even live. They lose motivation to perform labor to satisfy their presents wants (higher cost of living) which often would not be enough or the motivation to satisfy their future wants like sending children to school.

It is a public knowledge that our personal saving is declining, worst. Everyone is told to increase their spending and consumption to ensure our economic growth remains resilient. Everyone is desperate to spend their money now to cope the pressure of cost of living, leave no room for saving. Those with no savings apparently are more dependent on government.

To find the answer of this problem, one must look at the role of monetary policy in determining saving rates.

Inflation is often described as the delusion of prosperity. It means the creation of an appearance of prosperity and wealth based on the increase of paper money profits. In many cases, individuals actually grow richer as the result of inflation but the truth is they are gradually poorer. During inflation, different groups within the population are affected in different ways.

For house buyers, inflation makes the prices of houses rise from year to year because the housing loan interest are held down by the fact that much new money enters into the economic system in the form of PR1MA, MyHome and Mutiara Mortgage and Credit Sdn Bhd. As a result, housing industry is booming and looks very profitable. Capital is diverted into the purchase of houses and further capital is diverted into their construction. These groups are now in a very favorable position. Then, housing companies recorded artificial rising rate of profit combined with the artificial low rate of interest leads to the wasteful investment – in Austrian economics terminology this is known as malinvestment.

For example, The Star Sarawak “Johari airs concern over rising price as demand increases” dated 20th March 2014 reported that “The demand for houses in urban areas had continued to rise with the increase in population coupled with rural migration” and to solve the issue he even suggested “To increase the supply of houses by building more public houses under the various schemes and programmes in the state as housing was a basic need and should be within the reach of all strata of society especially the lower income group”

Here is my thoughts. Like I suggested above, it is the artificial low interest rates i.e cheap money as a result of increases in quantity of money (inflation) which spilling over into housing. Government agency and loan government regulated institutions such as Mutiara Mortgage and Credit Sdn Bhd established by Minister that prove where the artificial demand being created thus government creation of shortages.

It is the government that aggressively pursue policies that limit the supply of housing, that result in much higher prices. Does this make housing more affordable?

Let me ask this question to Minister. Why has Sarawak government become so deeply and heavily involved in housing sector? This State Housing Coordination Committee and perhaps thousands of industry people have spent an enormous amount of time and energy and money considering and discussing housing, housing legislation, and financing. Had all this legislative activity not taken place, would Sarawakians be less housed today or would they better housed? Would unit housing costs be higher or lower?

For the workers, due to inflation and the rise in consumption and undermining of saving and productive expenditure that it causes, and less production of capital goods and the degree of capital intensiveness. Therefore, less supply of capital goods for production and productivity of labor depends on the supply of capital goods – inflation is reducing real wage rates. Allow me to explain this case further.

Real wages depends on the demand of labor. Demand of labor depends on savings and productive expenditure. In the environment of inflation where higher consumption thereby retarding the growth of saving and productive expenditure, inflation then retards the growth of labor and as a result, reducing real wage rates. Prices rise even more will bring about more reduction in real wage rates.

The labor unions come into the picture to resist the fall of wage rates by lobbying or forcing the wage rates to increase (e.g minimum wage policy) as far as prices in which I concluded in Part I their action cause unemployment gradually as even now Malaysians have a harder time looking for jobs.

Inflation also does something else which encourages debt by leading people; the poor, low income people or young people in particular to borrow in anticipation of rising prices. Housing purchases for an instance have been mentioned earlier as a prime example of this effect of inflation.

They go heavily into debt to buy houses at already inflated prices and government regulations because they expect housing prices to go on rising. The same thing happens with education and healthcare spending even business spending for plant and equipment. This alone has caused the household debt crises and when they losing the effort to pay their debts then personal bankruptcies occurs.

If people fear of inflation, then the monetary policy which is to free the interest rates should be suggested as the simplest and most natural means of defense. Now the rates are artificially too low for too long. Because an artificial low rates are for those trying to live off past savings, our father mother grandfather who worked hard and saved money.

What happen now is the retirees including our father mother and grandfather have been forced to get jobs. Because inflation is driving up the cost of living like energy and food and of course since the interest rate is artificially low, they are earning nothing on their savings.

So that’s mean the inflation policy has forced them to work that most do not want to. What jobs are they probably going to take? The minimum wage jobs?

What happen now to us, the young labor? Debts. Bankruptcies. Demand for credit by this group is remain strong according to Bank Negara yesterday. Some unemployed, they living with their parents, adding more pressure and burden on family institutions.

Some working very hard to achieve a lot less despite all the machines that should have made us more productive. Everybody’s wife is working nowadays. Nobody has any savings that is why people are having smaller families. Our real money have lost their value. Standard living has gone down.

Higher interest rates should make the supply of money more expensive thus encourage more people to save for emergencies, retirement and production. In this situation, I can conclude low interest rates create inflation whereas raising of interest rates could prevent inflation.

The inflation and high of cost of living are the clear evidence that government officials and Bank Negara officials are subject to errors and uncertainties like other human beings so their ability to stabilize inflation cannot be relied.

The only thing that is reliable about Bank Negara and government is to create inflation and inhibit economic growth.

Anyway if you want to understand more about the relationship between banks and government, you can always read “Fragile by Design: The Political Origins of Banking Crises and Scarce Credit” authored by Charles Calomiris and Stephen Haber.

It is very strange to see majority of government officials, government economists and politicians from Barisan Nasional and Pakatan Rakyat continue to blame rising prices, leakages and corruptions on almost everything except the increase in the quantity of money. They do not care that prices will go up but I believe sooner or later it must come to an end inevitably where everyone in this country including politicians have to suffer.

What I am seeing and learning now is the people will get this vicious political feedback effect where the producers, monopolists, traders often said “You know, the prices going up, go and tell your Wakil Rakyat that they must have to increase the subsidy, curb corruption and leakages and so on”

These men are weighted to the fallacies of cause of inflation I refuted in Part I. They do not know it or will not admit it, I don’t know. I know one thing that this power is extremely useful for politicians to become popular – free education, free jobs, free healthcare, free housing. Given the political means to wealth becomes available no wonder every politician is rushing to gain control of the government.

Published by Free Malaysia Today on 30 March 2014.

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