Stuck in the Middle

The Deputy PM thinks middlemen are the culprits for high prices (excerpt):

Zahid: Higher prices of goods and services the work of 'cartels', not GST

BAGAN DATUK: The rise of market prices were not caused by the Goods and Services Tax (GST) but the actions of middlemen and “cartels” who manipulated prices for their own gain.

Deputy Prime Minister Datuk Seri Dr Ahmad Zahid Hamidi, who is also chairman of the National Cost of Living Action Council, said these middlemen and cartels also made things worse by accusing the government of raising the prices of goods and services when it was they who were the ones responsible.

“They blame GST as the main cause, but these cartels and middlemen are the ones who, before this, avoided paying the Sales and Service Tax (SST). It is because of these people that the government decided to (do away with SST and) implement GST….

…Zahid said it was true that there had been an increase in production, import, foreign exchange costs at one time, but this was due to the fact that the ringgit had fallen against the dollar.

However, he said, the ringgit had now risen against the Greenback but the prices of goods had yet to come down.

Despite the “cartels/middlemen” explanation being a fairly widespread belief, I’d like to see some evidence for it first. While the DPM might be using this to deflect the perfectly valid point that GST is not wholly and certainly not primarily responsible for higher prices, I don’t see it reflected in any of the (patchy) census data on distributive trade. If this was true, profits (value-added, less wages) in the wholesale/retail sector should be rising. Instead, margins have been declining, largely due to higher wage bills.

That last point is mostly wrong too. Based on the interaction between prices and the exchange rate, there has been very little passthrough of exchange rate movements into domestic prices, which implies margins shrank when the Ringgit declined, and just reverted to “normal” as the Ringgit regained value. This isn’t to say that there hasn’t been isolated cases of direct passthrough into prices (I’m looking at you, Apple), but there hasn’t been a general wave in that direction. Moreover, the exchange rate should be completely irrelevant for prices of services.

What disturbs me most about this, however, is that the last two times I’ve heard this sentiment being publically aired by a top government official was in Zimbabwe and Venezuela. Both were cases of hyperinflationary environments, and governments who’d prefer to scapegoat rather than address the real causes of price increases.

Would addressing distributional inefficiencies and monopolies/oligopolies reduce prices? If they exist, quite possibly. However, any such improvement would be a temporary one-off reduction in the price level, and won’t change underlying inflation.

Simple Nostrums For Complex Interactions: Details Matter

I'm quoting more than I usually do, because there are quite a number of fallacies to be addressed here (excerpt):

Rising tides of currencies globally
By DATUK ALAN TONG

A PACKET of nasi lemak (rice cooked in coconut milk) with a fried egg costs around RM2 nowadays. I remember getting a similar packet (and in bigger portion) at RM1 ten years ago. It is a 100% price appreciation in ten years! My friends and I were jokingly saying that nasi lemak would be a good investment tool if it can be kept for ten years...

…The global economies have been embarking on expansionary monetary policies since the financial crisis broke out in 2008. Central banks around the world are printing money to support their economies and increase exports, with the United States as the primary instigator.

Excess Reserves Don’t Necessarily Lead To Excess Credit Creation

I just can’t leave this topic alone. But it’s interesting to contrast the Malaysian experience with what’s going on in the US and Europe right now.

In my post on hyperinflation, I made the assertion that credit creation is no longer an asset side phenomenon driven by the logic of fractional reserve accounting, but limited on the liabilities side of the balance sheet by capital ratios. This in turn means that excess reserve creation carried out by western central banks isn’t necessarily inflationary.

Here’s some supporting evidence, in the Malaysian context. First the track record of loan growth since 1998 (log annual changes):

Jim Rogers Is Wrong

Maybe its his Asian perspective, since he’s based in the East now, but calling for interest rate hikes in the developed world is about on par with implementing fiscal austerity in a recession…oh, wait, they’re doing that too:

Rogers Says China, World Should Raise Rates in Inflation Fight

China and other global economies should increase interest rates to contain a surge in inflation, said investor Jim Rogers, chairman of Rogers Holdings.

“Everyone should be raising interest rates, they are too low worldwide,” Rogers said in a phone interview from Singapore. “If the world economy gets better, that’s good for commodities demand. If the world economy does not get better, stocks are going to lose a lot as governments will print more money.”

Hyperinflation? Ain’t Happening

There’s a popular belief that’s been hanging around since late 2008 that the US and other countries that have engaged in quantitative easing a.k.a. money printing, are going to experience hyperinflation and currency collapses. If you’re not familiar with the term, it’s inflation on steroids, where currency losses its value faster than you can spend it, and where prices are higher in the afternoon than it is in the morning.

The most recent and historically extreme example of the hyperinflation phenomenon is of course Zimbabwe, which has come to symbolise economic and monetary mismanagement on an unbelievable scale. But hyperinflation is not just a disease of weak and developing nations. The other prominent example is the short-lived Weimar Republic, the government that replaced Imperial Germany in the aftermath of World War I. There have of course been lesser borderline cases in the past century, notably Argentina and Turkey, though inflation in those countries never reached the sublime heights it did in Zimbabwe and Germany.

A New (Old) Way To Launder Money

This isn’t exactly on economics or even on Malaysia, but I couldn’t resist posting this:

Zimbabweans wash dirty US dollars with soap, water

By ANGUS SHAW, Associated Press Writer Angus Shaw, Associated Press Writer – Tue Jul 6, 10:19 am ET

HARARE, Zimbabwe – The washing machine cycle takes about 45 minutes — and George Washington comes out much cleaner in the Zimbabwe-style laundering of dirty money.

Low-denomination U.S bank notes change hands until they fall apart here in Africa, and the bills are routinely carried in underwear and shoes through crime-ridden slums.

Some have become almost too smelly to handle, so Zimbabweans have taken to putting their $1 bills through the spin cycle and hanging them up to dry with clothes pins alongside sheets and items of clothing.

It's the best solution — apart from rubber gloves or disinfectant wipes — in a continent where the U.S. dollar has long been the currency of choice and where the lifespan of a dollar far exceeds what the U.S. Federal Reserve intends.

Zimbabwe's coalition government officially declared the U.S. dollar legal tender last year to eradicate world record inflation of billions of percent in the local Zimbabwe dollar as the economy collapsed.

The U.S. Federal Reserve destroys about 7,000 tons of worn-out money every year. It says the average $1 bill circulates in the United States for about 20 months — nowhere near its African life span of many years.

Larger denominations coming in through banks and formal import and export trade are less soiled.

But among Africa's poor, the $1, $2, $5 and $10 bills are the most sought after. Dirty $1 bills can remain in circulation at rural markets, bus parks and beer halls almost indefinitely, or at least until they finally disintegrate.

Still, banks and most businesses in Zimbabwe do not accept torn, Scotch-taped, scorched, defaced, exceptionally dirty or otherwise damaged U.S. notes.

Zimbabweans say the U.S. notes do best with gentle hand-washing in warm water. But at a laundry and dry cleaner in eastern Harare, a machine cycle does little harm either to the cotton-weave type of paper. Locals say chemical "dry cleaning" is not recommended — it fades the color of the famed greenback.

Laundry worker Alex Mupondi said customers asked him to try machine-washing a selection of bills and the result impressed him.

But storekeeper Jackie Dube hasn't yet taken up advice of friends to cleanse the often damp and stinking U.S. dollars she receives for the garments and cheap Chinese consumer goods she sells in Harare. It's time-consuming, she says, adding that stinky, unhygienic bills are a problem.

"I get rid of the worst of the notes as soon as I can in change," she said.

Alex Mupondi, hangs one dollar notes on a drying line after washing them in Harare, Zimbabwe, Tuesday, July 6, 2010. The washing machine cycle takes about 45 minutes — and George Washington comes out much cleaner than before in Zimbabwe-style laundering of dirty money. Zimbabweans trading in the American currency since their own hyperinflationary notes were abandoned last year say washing their dirtiest cash works. (AP Photo/Tsvangirayi Mukwazhi)