Thursday, February 3, 2011

Why Inflation Matters In Indonesia—and Everywhere Else. Like China.

There’s a smart op-ed piece by William Pesek on Bloomberg, referring to the rise in the price of chillis in Indonesia, a basic (and very popular) staple in the country of 240 million (over three-quarters the size of the United States):
America’s Che Guevara?
Indonesians will put up with all kinds of indignities. Rising rents? Dismal infrastructure? Endemic corruption? Public inefficiency? Such is life. But a four- or five-fold surge in chili prices? An outrage!
The message is clear: Policy makers must intensify their inflation battle immediately and interest rates aren’t enough.
This is more than an exercise in avoiding ugly consumer- price-index readings. It’s about social stability in emerging economies that suffer from an underappreciated vulnerability. East Asia is home to a critical mass of those surviving on less than $2 a day. For families, surging costs for chili peppers, rice and cooking oils are a desperate issue.
Pesek is exactly right—inflation kills the poor. It brings simmering political issues to a boil—like what is happening in Egypt: The Egyptian protestors didn’t simply up and decide one morning, “Hey, wouldn’t it be great to start a riot?” They had a reason.

Pesek himself writes, “While 30 years of autocratic rule are what’s forcing President Hosni Mubarak from office, 10 percent-plus inflation isn’t helping.”

However, he’s wrong about the causation: Mubarek didn’t cause the unrest. What caused it was the 10% inflation—the lit match tossed in a pool of gasoline. The 30-year rule of Mubarek was 30 years of drip-drip-dripping gasoline—but were it not for the inflation, Mubarek would still be sitting pretty, grooming his son to take over. 

Now, if inflation starts hitting a passive population—such as America’s or Europe’s—the Central Banks will raise interest rates without any worries about civil unrest. 

But what about a restive population? Like Egypt? Like China? 

The Chinese have a dictatorship, but the political stresses and strains there have been masked by the generalized economic progress. If and when severe inflation hits the poor and the restive—which in China is roughly half the population—what will the Chinese reaction be—higher interest rates to halt inflation and protect the renminbi?

No! It’ll be food and price controls. Because for governments with restive populations, that’s the only choice they have: Pay off the people with subsidized food and fuel, or prepare to put them down with soldiers and tanks.

That’s the decision inflation forces these governments to make.

It would be well to remember that the inflation these countries are experiencing was exported by the United States, via Federal Reserve policy. So when the riots and revolutions start happening in Asia, we should think of Ben Bernanke not as the chairman of the Federal Reserve, but rather, as the Che Guevara of the new millennium. 


  1. We are definitely seeing these effects here in the southern Philippines. The Moslem rebel movements here on Mindanao are much less about religion than they are about economics. And here in the Philippines, the inflation bite is even worse, because the economy is kept afloat in large part from money sent home by Filipinos working in the U.S. and other places -- and the geniuses in Washington have managed to devalue the dollar by 30% (so far) against the Philippine peso! Thanks a bunch, Bernanke!

  2. You can rail about the upcoming inflation and all its consequences all you want, but there's no other possible political solution to the massive debt out there, both public and private. Congress is simply NOT going to reign in spending and raise taxes. They're not going to cut social security, or really much of anything.

    They are going to inflate. It is the default policy, and the easiest policy. Even while pretending to debate what to do, they are inflating.

    It is not just the public debt that is the problem. The massive private debt out there must be retired or people will not be able to get on with their lives. Inflation is a sort of massive reset button the government is pushing, because there really isn't anything else that can be done.

    Oh, they theoretically could end their wars and balance the budget, but they'll never come to political agreement on the matter. There are too many self interested groups out there that will block it. And we can't forget the gargantuan private debt, either, which would not be touched by government austerity measures.

    So inflation is the only policy we all can "agree" to. We'll all get poor together.


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The cult of stability is a culture of death.