The Curse of Inflation

Important Update from the blogger: I have lost count on how many visitors visited this article. Unfortunately, along with my growing understanding on the very issue, I must confess that my thought in the later part of this posting has been flawed, so it a serious revision is in order. Please accept my apologies. As a quick fix, I have crossed the lines where I think I was mistaken. Suffice it to say here here that inflation is man-made; and as long as governments keep printing money "out of thin air," inflation will haunt us.

A household word practically at the tip of every tongue, inflation is an invisible hand that curtails what every unsuspecting citizen earns, like any other authority-imposed taxes. Ours is the age of inflation; its existence goes so much without saying that one would be equally damned whether or not to question about it.

What is inflation by the way? What do we know about it? Can we live without it?

By popular definition inflation is "an increase in the general price level, which results in an excessive or persistent increase, causing a decline in purchasing power" [G. Mankiew]. Having witnessed how prices move all this time, you'd probably agree with the casual definition.

Yet that definition actually does not define inflation; rather, it only defines the consequences of inflation. It does not tell us what it is and what causes it.

There is another, and relatively older, definition saying that inflation is "an increase in the amount of money and credit in relation to the supply of goods and services." This irrefutable proposition offers a clearer and more straightforward definition of what inflation is. It seems rather strange to me if this more straightforward definition is often neglected or "abandoned" by many economists today--I haven't seen it quoted so except in "out of date" texbooks and dictionaries (maybe I just need to search more). Anyway, in simpler terms, inflation means there is more money pursuing the available goods or services.

Since inflation essentially concerns the behavior of money, the concept and nature of money cannot escape the discussion about inflation; but this is beyond the purpose of this posting. Fiat money, or the money as we generally know today, is a kind of limited good in itself. It is subject to the supply and demand. Thus, inflation can happen under any of the following supply-demand circumstances:

a) The supply of money goes up; b) the supply of goods/services goes down; c) the demand for money goes down; and d) the demand for goods/services goes up.

At the time of this posting, in Indonesia there has been a new frenzy about buah merah, or the red fruit of Papua. This fruit is believed by many to have amazing potency to cure various diseases. Its market price, sold as elixir, has remained on the increase. Three months ago, a relative of mine bought the elixir at Rp. 100,000 a bottle. Last week, a colleague sold it to two other colleagues at Rp. 375,000 each. Has inflation occured? Yes, it has; it has caused a price increase, albeith perhaps just a temporary phenomenon, hardly imparting pressures other goods.

What if a government increases the price of fuel, which as a result, causes other prices to move correspondingly? Has inflation taken place? Indeed; in this case inflation is working itself as a force towards price readjustment following some sort of price distortion. This kind of inflation is more long lasting and 'infectuous".

An important feature of the price increase from such inflation is that it does not happen at once; it happens sequentially and needs time before it peaks up and eventually steadies or abates. (Bank Indonesia has been criticized for not moving quickly to tamper inflationary pressures caused by the government's decision to remove the fuel subsidy. Moreover, the rising price of world's crude oil has been reason enough to be worried of global inflation.)

To return to the 2nd definition above, the major cause of inflation is the increase in the supply of money. Of course, as implied in the case where demand increases, inflation can occur for other reasons. Still in Indonesia, in areas struck by natural disasters in North Sumatra, which destroyed the supply systems, we saw an almost immediate rise in prices, as goods were becoming scarce relative to money. Yet this kind of situation is extraordinary; for the most part, it is caused when the money supply rises faster than the supply of other goods and services. This is a strong reason why that any effort to combat inflation in any country should attack the causes of increase in the money supply.

A systematic increase in the amount of money and credit occurs through and by banking activities. Most banking activities in the world have been possible through the so called credit formation due to the adoption of the fragmentary reserves by the central bank. Thus, a great many factors of inflation rests with the central bank, an institution that, ironically, vows to "maintain stability" and "curb inflation."

In a world shrinking with globalization, in a more and more open economy where capital can trottle the globe at a time when exchange rates are allowed to float freely, the phenomenon of inflation has aggravated and become so complicated that no country may be able to solve it singlehandedly if it so aspires. The world's economy has interlocked in such a system, and most governments and central banks are preoccupying very hard with the efforts to curb the consequences of inflation without addressing its main cause.

This brief article has tried to hyphotesize that the interlocking of the world's economy under the present hedonic monetary arrangement cannot mean otherwise than that inflation has been and will remain with us. With no alternative system on the horizon, it seems that the curse of inflation will remain with us for a very long time--perhaps for as long as we live.


our greater common good

President SBY's signing of the Government Regulation no. 36/2005 on land acquisition as reported in Jakpost's editorial yesterday is indeed a crucial move to address one most important aspect in the public infrastructure development. Land acquisition has been a major obstacle to infrastructure development, and this kind of development is one domain where Indonesia is seriously lagging behind its neighbors. As Indonesia does not have adequate fiscal capacity to finance infastructure development, it usually turns to external borrowing.

Tris, a good friend working for an international development agency, confirmed that land procurement was among the most crucial problems in infrastructure development. He added that land acquisition guarantee is a conditio sine quanon at the time of signing of loan agreements. Ideally, land acqusition problems have been resolved by the time of the signing. Otherwise it will create serious problems to the national and/or respective regional government. Moreover, cases were abound where the prices of land for future public infrastructure projects skyrocketed, mostly by well-informed preempters. Soon, in extreme cases where acquisition negotiation cannot resolve within 90 days, regional land agencies can ask the national land agency to revoke the property rights under the President's approval.

I agree this is a good move from the government, albeit with some reservations. This stern policy may work well without gravely violating basic human rights or impairing the sense of justice of the people if and only if the stipulated conditions are thoroughly met and the procedural steps are properly obeyed; hence the crucial importance of the implementation. It's often too easy for the powers that be to justify themselves by saying: it's for our greater common good. To officials, pieces of land acquaired may mean a job well done; to affected individuals, this may shatter their whole universe. How are landowners, for instance, protected against the oknum? Such overacting officers do exist everywhere in the country, as everyone Jack (or Badu?) agrees. It would thus be ideal to include elements of civil society and/or local wisdom/traditional leaders in regional land committees so that the people can get fair representation. Surpressing and squezzing the common folks is an old song. It's time to deliver, really. To show that the government actually exists, and serves its people.


5 paragraphsful of 'nothing'

This piece of dross may echoe with the sound of incoherence. If it does, I, as a blogger, if I decide to use a groupthink's opinion about the lightness of blogging, need not apologize to the reader, because I am unmistakeably exercising the one priviledge as a blogger. All the same, I am by this not telling any personal opinion about what a blog should be nor what bloggers should post. If I have many drosses to share, I'll make sure I tell it one at a time.

Yet, I think it is in the fitness of things that I apologize for the incoherence as it reflects the current state of my mind, plus a little anxiety from a personal struggle to beat smoking for good. Just mind: this post is not powered by Lady Nicotine! :)
Now I'm all set to post about nothing: Some happier days ago I took a leave from work but eventually had to cancel the family plan to do Yogya because our daughter was slightly ill. But in no way was slightly ever an appropriate word when concerning the welfare of your only child, especially when the the event in question was still unfolding! Besides, very few are the occasions when we really have full handle of the situation. Anyway, as later this little darling of ours recovered, guilty feeling was elsewhere; it didn't accompany me as I drove alone to visit some friends in one university I once attended. The last time I was really there for them I couldn't remember. Then I ended up sitting in classroom where a guest lecturer from Milan, a Russian-born American whose great grandfather--a friend told me later--once invented a machine for orgasm(!), was throwing an unpaid lecture about his cup-of-tea subject: hollographic media and psycho-physiological responses it can emanate to the viewer's attitude.

The audience itself consisted of college students and some lecturers. Most of the former were quintessential of what I had in mind about today's MTV generation should look or be: pretty similar to one another. Some of the latter were actually well known literary critics, albeit rather esoteric. Asking for our impressions in return, this outspoken lecturer then ran two bizarre films. The titles escaped me but for their short duration, they were unbelieveably boring--but of course we all paid him our best attention. Then at his prod, a literary critic commented that one of the movies was about estrangement. Another, a senior lecturer, said that it was probably something related to the Tsunami, and that it had probably been made to show how people were not sufficiently symphatethic. When our eyes met, I knew it was my turn to speak. I said I could tell you how these images were produced, but I would not go so far as to tell there was meaning in what you produced. Actually, this was my long version of saying they were b-s, but this lecturer is actually my friend's new husband. He laughed at my remarks, and said, "Yep, that's it; there is no meaning in them all" and went on with something I could reduce at something like, "To those of you in search of meaning in the many faces of media, you might as well forget it. There is no meaning." Most of the audience laughed in relief over something God only knew. There is no meaning! As simple as that; not new, but it was the first time that I had heard from someone in the flesh. I was looking for loopholes behind what had been said. I needed more context, but the situation gave me no further chance for discussion..

Now this is about the justification of which my mind seems to have been programmed for--and my heart, for some sort of denial. Is it true that today's living has ushered men to nihilism; or rather, have we reduced ourselves to nihilism and pointlessness that postmodernism has triumphed with writings that captured the very phenomenon?