Moderate price increases may be good for the country

HW Looi

Modified 16 May 2019, 9:29 am

LETTER | Practically all the currencies of the world are fiat money i.e. money that is not backed by anything of value other than the guarantee by the government of that country which makes it legal for that particular currency to exchange for goods and services.

I agree that when you print money in gross excess of your GDP growth, it will be obvious that the foreign entities will assume that the money that is printed is indeed overvalued and as such will be devalued against all the other currencies.

That’s why it is absolutely essential that the money is “created” in internationally accepted ways i.e. only in slight excess to that of the GDP and other economic parameters increments.

Gross Domestic Product (GDP) > GDP = C + G + I + NX where:

"C" is equal to all private consumption, or consumer spending, in a nation's economy;

"G" is the sum of government spending;

"I" is the sum of all the country's businesses spending on capital; and

"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports).

A lot of Malaysians do not realise that government spending and the people's spending and investments represent the major part of the Gross Domestic Product.

For instance, the US has the largest GDP and more than 70 percent of this is from private consumption or consumer spending. Government spending constitutes the other major part of the equation.

In other words, the more the people and the government spend, the greater is the GDP.

An increase in the GDP means the government is able to print (create money out of thin air) more money for the people to use, without the foreigners devaluing our money.

That's why the BRIM (Malaysian-style helicopter money) increased our GDP and enabled our government to create more money for the people.

America owes about US$22 trillion and yet none of the smart American economists are worried because all the money owed is in US dollars and if the creditor wants their money back, the US can simply print the money and give it to the creditors.

Because America is the only superpower in the world and because everybody presumes that America will always be there, its money is considered to be a "safe haven asset" and as such, it can create as much money as it likes without the fear of devaluation. There is no other "safer" currency which can be devalued against as the British pound, the yen and the euro are all in trouble as well and are also in the process of "quantitative easing".

When America creates money out of thin air (a process diplomatically termed as quantitative easing) the US dollar maintains or even increases its value because when this happens, it is a financial crisis and all the fools will foolishly buy more "safe haven" assets i.e. US dollars.

That's why economics is called e-con-omics because it is e-ssentially a con game, and con-fidence is of utmost importance. Just like what Warren Buffett said about the trade deficit the US has with China, “ Their workers work very hard to produce the goods and we send to China little pieces of paper for their goods.”

When a country like Malaysia prints more money, we have to make sure that our GDP rises, otherwise our ringgit will be devalued by the foreigners. One of the best ways to increase our GDP is for the people and the government to spend more.

Some inflation is also good for the economy as this creates a sense of rising wealth and encourages the people to spend more and thereby increase the GDP.

For instance, if a person's house in Malaysia is worth RM100,000 a few years ago and has since increased to RM200,000, he will not just feel richer by RM100,000 but is actually richer by that amount because they can now sell it for that amount or use it as a collateral for a bank loan eligible for that amount.

In other words, RM100,000 is being created out of thin air.

Another example is that, if a char koay teow man can charge only RM1 per plate and is not allowed to increase his price for the next 10 years, he will not able to contribute to the GDP increase.

On the other hand, the Singaporean char koay teow man increased his product to S$10 per plate, he is obviously able to increase his contribution to the GDP by 10 times and in the end, you will know which country is going to be richer.

Increasing productivity is another way of increasing the GDP.

Unfortunately, we have to realise that for certain types of economic activity especially in the service sector, it is practically impossible to significantly increase efficiency.

Let's say the char koay teow seller could fry 10 plates of koay teow per hour and he can work 10 hours per day and is now producing 100 plates per working day. That is the maximum number of plates that the poor man is capable of frying.

Frying koay teow is an art and not like making a car where the efficiency can be increased by the use of more machines. As they say, "the poor man has only one pair of hands".

If he wants to double his already maximum capacity, he has to employ another man and then, in economic terms, the gain in production per person remains the same.

And if by magic he could fry 200 plates of noodles next year, is he capable of doubling his customers to 200? Perhaps, he can increase his production by increasing the size of his wok and the amount of noodles he fries at one time i.e. decreasing the quality. This will obviously decrease the number of customers.

What I am trying to say is that there are certain types of economic activity, especially those involving the service sector, where the input is predominantly quality human expertise and where science is not relevant in increasing the output. The best way to increase the contribution to the GDP is still by increasing the prices.

Another good example is the heart surgeon. At most, he could do two cardiac bypass surgeries per day and if you ask him to increase his output by doing four cardiac bypass surgeries, you can guess what will happen to the poor patients and to the poor surgeon as well.

That's why suppressing the price unnecessarily may be counterproductive. So please do not keep on moaning about the increase in the prices of everything - it may be good for the country.

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.

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