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.