Central Banks

Mainland monetary tools an inflated fairy tale of fortunes

PUBLISHED : Friday, 11 January, 2008, 12:00am
UPDATED : Friday, 11 January, 2008, 12:00am

'A spokesman for the palace said King Canute would command the waters to cease rising in order stop the flooding of low-lying areas, as last month's official data showed the tide was still rising.'

Viking Times, 1008 AD

I have a degree in history, you see, and I occasionally put it to work to make myself feel that I didn't entirely waste four years at university. My readings of history tell me that some things never change, witness the following more up to date version of the King Canute news item:

'The central government said it would cut prices for basic necessities such as food, oil and public services to step up efforts to curb widespread inflation as last month's official data showed prices were still rising.'

SCMP, January 10

There really is not much difference between these two except that controlling inflation is easier than stopping the tide. To stop the tide you have to stop the orbit of the moon and, with King Canute gone, only George Bush has enough conceit to think he could pull it off.

To stop the general level of consumer prices from rising you have to restrain the amount of money washing around in the system. It can be done with the proper tools. But it cannot be done King Canute fashion by telling prices to stop rising. This has never worked.

The simple fact is that inflation is everywhere and at all timess a monetary phenomenon, the result of too much money chasing too few goods and services.

I quote the late Milton Friedman in saying so, of course, but I think the truth of his observations on the matter have been pretty well established even if some of his followers fooled themselves about how easily they could change too much money into just the right amount of money.

It certainly isn't easy to do in the mainland. The monetary control tool chest is essentially a free market one. You need banks that make loan decisions on a commercial basis, you need interest rates that are basically market determined and it helps to have a thriving debt paper market.

The mainland, unfortunately, doesn't have these things and must thus rely heavily on the Samson Alternative - the jawbone of an ass - or at least of monetary authorities who talk up a fury in trying to talk prices down.

But no matter how much they say that prices may not rise as this would hurt consumers, they cannot stop the general price level from rising if there is too much money in the system.

They can stop it, or at least provide relief, if the phenomenon of rising prices is limited to only a few goods or services and the causes lie in bad weather, disease or an interruption of imports. But they cannot stop it by the jawbone method if the problem is a general one.

All they can do in such cases is fool themselves by dictating prices across the entire consumer basket and then pretending that these truly are the prices that the consumer pays.

Almost certainly they are not. Almost certainly all that the authorities have done is turn an open market into a black market that will defy them. Their stated rate of inflation has become a public relations illusion only and the real inflation rate is much higher.

My evidence for it is not only that Beijing now openly admits manipulating consumer prices, not only says it will continue doing so, but now actually talks of cutting the prices of basic necessities to compensate for rising prices elsewhere.

Telling prices to rise no higher is only King Canute, an historical event, but when you command rising prices to fall by fiat your story is best told by starting it with 'Once upon a time ...'

'Lawmaker Fred Li Wah-ming, a member of the Consumer Council, suggested a boycott of shops that did not restore their prices.'

SCMP, January 10

Fred may be glad that he's a lawmaker. He certainly doesn't seem qualified to be a bread maker or a maker of anything else that involves selling goods and services to the public.

We shall leave aside the question of whether flour prices have indeed come down again after a Beijing decision to exempt Hong Kong from a mainland export tax on flour. We shall also ignore the question of whether the costs of other bakery ingredients have gone up. Perhaps they have, perhaps they haven't. I'm not a baker.

But if costs of flour and other ingredients have come down again, I do know that shoppers have one very good way of exerting a little price discipline on bakers who keep their bread and pastry prices high while other bakers are dropping prices.

It is to walk past the bakeries that charge the higher prices and walk in the door of one that has dropped prices.

And, guess what, Fred, it doesn't take you or the consumer council to organise this sort of boycott. Consumers do it all on their own, do it every day, and do it with every product or service available on the market.

But I suppose that lawmakers wouldn't have as much reason to make laws if they recognised this fact, and that would never do.