Malaysian Economy Reality Check: Inflation

As we are gearing up for an election in Malaysia, there are more and more pronouncements from the current government on how well the country, and its economy, is doing. The Star recently reported on the latest CPI numbers:

Malaysia’s consumer price index (CPI) is expected to increase by between 2% and 2.5% this year, mainly because of the implementation of minimum wage policy and subsidy rationalisation programme in 2H2013.

“Resilient domestic demand could possibly facilitate partial transfer of higher cost to consumers particularly by industries that are heavily reliant on foreign labour,” said Hong Leong Research.

It forecast the first half of 2013 (1H13) would have a mild inflation trend at about 1.6% on-year and rising to 2.4% on-year in the second half.

The government reported that the CPI for last year averaged by 1.6% in comparison to 3.2% in 2011. The CPI for December 2012 increased to 1.2% from a year ago, the slowest pace within a three-year

So all is well then? Inflation is low and currency printing can continue without problems? If inflation is so low, then why are so many people complaining about how everything is getting more expensive? And why do things get more expensive anyway?

Time for a reality check!

First off, these guys pretend that CPI, or the Consumer Price Index, which is an index of the prices in a basket of products, is what defines “inflation”. That is not how inflation works in the real world though. Inflation has traditionally been defined as the inflation of the money supply, i.e. the total amount of Ringgit Malaysia (RM) in this case, and not price changes. When the overall level of prices increases in a country that is a symptom of an inflation of the money supply, the total amount of available RM. So why look at a symptom – price changes – when you can instead look at the underlying cause, which is inflation of the money supply.

For those of you who don’t know how the money supply can increase – and it can be quite a shock when you see it for the first time – I recommend watching the following video on how the fractional reserve banking system works:

Did you watch it? Pretty damn weird, isn’t it? For those of you who skipped it, here’s the short version:

Basically, the government with the help of the central bank creates currency out of thin air, and then the rest of us create many multiples of that when we get loans for houses and cars, and when we use credit cards. For every loan we get new RM is created, because the bank doesn’t actually have that money, they just create it (or most of it anyway) when you sign the papers.

So when we talk about inflation, what is important is that when all these new RM is being created it lowers the value of the existing RM. Because of the increase in availability of RM this changes prices over time, but not all prices at the same time, and some prices go up more than others. In another article I’ll deal specifically with CPI, and how it has been set up to really give a misleading picture. But one thing at a time.

If you are still not convinced that inflation is about the money supply and not price levels, I’d recommend reading the awesome book Mystery of Banking by Murray Rothbard, which explains this and how currency supply inflation relates to price inflation. It’s a free PDF download that you can get here.

Alright, so now you know how the system works, why money supply inflation is the real inflation we should be worried about, and you also have some idea of how screwed up it is in the US. What about Malaysia? What is the inflation in Malaysia, and how has it changed over the past decade? And how does this influence everything else?

All we need to figure this one out is the annual report from Bank Negara, which is available from their website. Then we can calculate the currency supply inflation in Malaysia, which we can use to adjust the value of everything else, from GDP to household incomes, to property prices and even the EPF pension fund.

When I did this exercise I got the shock of my life when I saw the results. Chances are most of you will also get a new perspective of economy in general, and how to think about value and inflation.

Since I’ve already done this, I have prepared a spreadsheet with all the details. The video below will walk you through the first sheet, which describes how to calculate inflation. Later blogs and videos will then use this to give us truly inflation adjusted values of GDP, property prices and more.

Here we go:

So basically inflation since 1993 is in total 822%. That’s a HUGE inflation! Uh-oh…

And that is today’s Reality Check.

 

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Internationally renowned Swedish software developer with a passion for Systems Thinking and understanding the many facets of the human condition, and how we can move forward by understanding the past.

Posted on 23 April 2013. You can follow any responses to this entry through the RSS 2.0.

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13 Responses to Malaysian Economy Reality Check: Inflation

  1. Great effort author thanks to sharing best information. I bookmark your website visit again to see more post.

  2. Thanks for sharing your thoughts on LoyarBurok. Regards

  3. nigel

    you are quite wrong. there is public money and bank money. there is very little correlation between bank money growth and inflation. indeed money supply has grown but this is necessary to support the growing gdp. pls dont disseminate wrong economic ideas such as this. what is your qualification anyway?

  4. Reality Check

    Historically speaking the word "inflation" refers to money supply, not price inflation. Looking at other countries who have gone through an excessive money supply inflation (and 822% in 20 years is a lot), it eventually leads to high price inflation. It's mostly a question of velocity. The issue, then, is that Malaysia has now built up a 1.3 trillion money supply, which when triggered by an increase in velocity can lead to amazing price inflation. What happens then? Savers and pensioners get screwed up, and eventually interest rates go through the roof, and people lose their houses if they are on a mortgage.

    But if you want to play-pretend that everything is going great by looking at CPI, go ahead.

    • Barry

      Rickard: Historically speaking, the earth was the center of the universe too, but that's obviously no longer the case. Definitions change. Inflation today refers to price inflation. Ok, look, let's take a look at the quantity theory of money which you espouse and which is in fact a simplistic model for the economy. MV=PY. You claim an increase in money supply (M) and velocity (V) will lead to amazing price inflation (P). Have you forgotten the Y, or GDP growth, in this equation? In other words, an increase in M and V can be linked to growth in output, Y as well as P. This is what I've been repeating! The "money supply inflation" you are so fearful about arose due to Malaysia's rapidly expanding economy!

  5. Barry

    Ok I've had enough of this bullshit, now it's being reposted? Ellese is right, money growth comes from an expanding economy. Every assumption the author uses is wrong, even down to the use of M3, which includes illiquid assets such as long-term savings. I've already commented to his original posts on his website here: http://www.reality-check.info/2013/04/01/malaysia

    Point to note: The author is NOT an economist, he's not even from the financial sector. This is utter conspiracy theory bullshit.

    proud2bmalaysian: I don't know what proof you're demanding, but I don't think you understand the basics either. The 5% growth is REAL growth. Money supply is linked with NOMINAL growth. I'm not sure what discrepancy you're referring to here.

  6. Dexter

    saw the posts on inflation and GDP/GNI. I posted a comment on the GDP/GNI post, but i think it's more appropriate to post it here. I do feel that the inflation rate shown by the government is downplayed, but i find your calculation is flawed too. here's the comment i posted:

    "Nice study!

    however, I find a flaw in the calculation (im not an economist, so i may be wrong) in the assumption you made on inflation. You have compared the currency supply from 1993 to 2012, and the inflation rate that you calculated is based on this increase of currency. But there are a couple of crucial factors that I think were neglected here:

    1. The growth of the country. From 1993 to 2012, there is growth within the country. This growth increases our wealth and therefore increases the value of our currency. Your calculation is based on the assumption that, our country maintained the same from 1993-2012, whilst the supply of currency keep increasing. So i believe that the inflation should be supply of currency minus growth of the country. The growth of the country is reflected in the GDP, but then again it is debateable whether the GDP reported is real.

    2. The value of our currency is affected by the value of currencies of other countries too. How valuable our currency is compared to other countries, will depend on many many factors and is too complex.

    Putting the complexity of foreign currencies aside, I believe that the supply of currency should be propotionate to the growth of our country, or GDP (in percentage). However, like mentioned before, the GDP reported may not reflect the real growth of our country.

    Would love to get your comment."

  7. proud2bmalaysian

    Tartarus,

    Ellese will never put up his position with details so that others can also critique. He only specialize in calling names and saying rubbish to other people's work. Still waiting for him to put up his position clearly.

  8. Tartarus

    proub2bmalaysian, ellese still not explain to you yet in regards on your question on GDP growth. Please follow up with him.

  9. Ellese

    Money supplies must be adequate to sustain growth. Where its in excess it will cause inflation. If short in supply it will cause deflation. Now measurement of inflation anywhere in the world goes by increase in price. No one country determines inflation by money supply. Even US, UK, france etc etc. You know why? Every ringgit increase in money supply does not tantamount to rm1 increase in price of goods. That's why this article is rubbish meant for the partisans. It's part of a propaganda to look credible. I've had enough of this.

    As to p2b character, please go to my blog to see how he argues. Hakbersuara.wordpress.

  10. proud2bmalaysian

    Ellese

    Why don't you show your argument to compare with GDP growth? Since we have been averaging a 5% the past few years as the Govt asserted and the Govt had injected the well over RM100 billion each year in 2011 and 2012, why did that discrepancy happen? Can you show your table so we can all compare?

  11. Pepper Lim

    Nice!

  12. Ellese

    Sometimes people write rubbish. Money supplies must grow when economy expands. Otherwise we get deflation. So please lah don't give this ridiculous assertion. Compare it with growth rate and how much of money supplies we need. It's the same economic theory all around the world.