The next crisis -- global inflation
Thursday, 16 April 2009
Mahmud ur Rahman Choudhury
IN an attempt to grapple with the global recession, major economies such as those of the USA, Europe, Japan and China are pumping billions of dollars/money into their economies. Banks and industries now have money to produce goods and services, engage in increasing trade and commerce and provide employments and earnings to people who will now have money to buy those goods and services. That will get the "cycle" of economy moving again.
Unfortunately though, more money does not always lead to better economics because it is impossible to match up the amount of money in circulation with the quantity of goods and service produced and available for sale in the markets. So, with everybody having lots of money to spend, will be stridently demanding and competing for scarce goods and services, driving up the prices of those goods and services. Thus, more and more money will be needed for purchasing lesser and lesser goods and services and although incomes and employments will increase, they will never be able to keep up with the increase in prices - that's inflation and it's just round the corner because governments of major economies have flooded their economies with surfeit of money.
Inflation is as bad as a recession. In a recession, money is scarce as compared to the availability of goods and services, leading to a downslide in prices which then prompts a reduction in production of goods and services, which then leads to a cutback in employment and earnings; in inflation, goods and services are scarce as compared to the availability of money, pushing up prices and reducing the purchasing power of the paper money or currency. In both cases, everyone suffers except for the super-rich.
So, what is all this going to do with us here in Bangladesh? We are suffering the pinch of recession and the government, increasingly worried about it, is going to increase its spending on subsidies to agriculture and to industries; to infrastructure developments; to social safety nets and to the projects under the Annual Development Programme. To do this, the government will attempt to increase its revenue earnings through increased taxation (which will draw-in some of the surplus money) but will also borrow heavily from local banks (which already have accumulated huge surpluses) as well as from international financial agencies and donors. By such "deficit" financing, the government will attempt to tackle the impacts of the global recession. Employments and earnings will increase and so will production of goods and services but with so much of money afloat, inflation will kick-in as has been explained above.
What about our trade and commerce; imports and exports? Well, things will balance themselves out because most of the raw materials and machineries we need for export industries, are imported and whether in a recession or inflation the costs of imports and costs of exports will always leave a margin for profits. If exporters have the acumen, they will in fact make more money out of inflation than out of a recession because an inflation leads to a sellers' market where sellers can set the price and get it too for scarce goods and services. That profit will go into the pockets of importers, exporters, bankers, insurers, transporters and the government.
So, the government and its financial regulatory agencies have to step in very carefully into tackling recession and not be stampeded into taking measures and policies which will lead to inflation because our Nation does not have the economic strength to permanently oscillate within a recession-inflation cycle and still keep the balance.
Additionally, the government ought to take advantage of the global recession and buy up and stock up on scarce resources (such as oil, cereals) whose prices will once again go up as soon as the global inflation starts kicking-in. It is by these and such other pragmatic and long-term measures that our government can balance between a global recession and a global inflation and still gain from both.
The common people -- the millions of workers and farmers -- have little understanding of these complex issues and they will be happy to have been able to survive and live-through one more difficult day of grinding labour and grinding poverty.
If the Awami League (AL) government means to change all this so as to benefit the "people" in any meaningful way, the government will have to go back to the basics - to a system which will allow agriculture and industries to feed on each other benefiting and sustaining both.
We must have industries based on resources and raw materials which our land and our people can produce; only then can we have import-substitutions and value-additions which will benefit all of us as opposed to benefiting a small coterie of so called "industrialists".
The author is the Editor of The Bangladesh Today. He may be contacted at:
editor@thebangladeshtoday.com
IN an attempt to grapple with the global recession, major economies such as those of the USA, Europe, Japan and China are pumping billions of dollars/money into their economies. Banks and industries now have money to produce goods and services, engage in increasing trade and commerce and provide employments and earnings to people who will now have money to buy those goods and services. That will get the "cycle" of economy moving again.
Unfortunately though, more money does not always lead to better economics because it is impossible to match up the amount of money in circulation with the quantity of goods and service produced and available for sale in the markets. So, with everybody having lots of money to spend, will be stridently demanding and competing for scarce goods and services, driving up the prices of those goods and services. Thus, more and more money will be needed for purchasing lesser and lesser goods and services and although incomes and employments will increase, they will never be able to keep up with the increase in prices - that's inflation and it's just round the corner because governments of major economies have flooded their economies with surfeit of money.
Inflation is as bad as a recession. In a recession, money is scarce as compared to the availability of goods and services, leading to a downslide in prices which then prompts a reduction in production of goods and services, which then leads to a cutback in employment and earnings; in inflation, goods and services are scarce as compared to the availability of money, pushing up prices and reducing the purchasing power of the paper money or currency. In both cases, everyone suffers except for the super-rich.
So, what is all this going to do with us here in Bangladesh? We are suffering the pinch of recession and the government, increasingly worried about it, is going to increase its spending on subsidies to agriculture and to industries; to infrastructure developments; to social safety nets and to the projects under the Annual Development Programme. To do this, the government will attempt to increase its revenue earnings through increased taxation (which will draw-in some of the surplus money) but will also borrow heavily from local banks (which already have accumulated huge surpluses) as well as from international financial agencies and donors. By such "deficit" financing, the government will attempt to tackle the impacts of the global recession. Employments and earnings will increase and so will production of goods and services but with so much of money afloat, inflation will kick-in as has been explained above.
What about our trade and commerce; imports and exports? Well, things will balance themselves out because most of the raw materials and machineries we need for export industries, are imported and whether in a recession or inflation the costs of imports and costs of exports will always leave a margin for profits. If exporters have the acumen, they will in fact make more money out of inflation than out of a recession because an inflation leads to a sellers' market where sellers can set the price and get it too for scarce goods and services. That profit will go into the pockets of importers, exporters, bankers, insurers, transporters and the government.
So, the government and its financial regulatory agencies have to step in very carefully into tackling recession and not be stampeded into taking measures and policies which will lead to inflation because our Nation does not have the economic strength to permanently oscillate within a recession-inflation cycle and still keep the balance.
Additionally, the government ought to take advantage of the global recession and buy up and stock up on scarce resources (such as oil, cereals) whose prices will once again go up as soon as the global inflation starts kicking-in. It is by these and such other pragmatic and long-term measures that our government can balance between a global recession and a global inflation and still gain from both.
The common people -- the millions of workers and farmers -- have little understanding of these complex issues and they will be happy to have been able to survive and live-through one more difficult day of grinding labour and grinding poverty.
If the Awami League (AL) government means to change all this so as to benefit the "people" in any meaningful way, the government will have to go back to the basics - to a system which will allow agriculture and industries to feed on each other benefiting and sustaining both.
We must have industries based on resources and raw materials which our land and our people can produce; only then can we have import-substitutions and value-additions which will benefit all of us as opposed to benefiting a small coterie of so called "industrialists".
The author is the Editor of The Bangladesh Today. He may be contacted at:
editor@thebangladeshtoday.com