Categories
Economics History & heritage

[1106] Of fighting inflation by shooting down the zeros

What would one do to fight runaway inflation?

In Venezuela, chop the zeros off:

CARACAS (Reuters) – President Hugo Chavez said he will chop three zeros off new bolivar currency bills to bolster Venezuelans’ perception of a strong currency in a bid to curb inflation, which is now highest in Latin America. [Reuters, Feb 16 2007]

If I remember my history correctly, the German Empire took similar route to combat inflation right after the First World War. Though similar, there is one major difference.

In the aftermath of War to End All Wars that did not only fail to end all wars but instead made way for a larger war, the Allied was victorious and the Central Powers was devastated: the Ottoman Empire ceased to exist, Astro-Hungary disintegrated while the German Empire was humiliated through and through. As if such victory was not enough, the Allied at the Treaty of Versailles imposed heavy war reparation against the German state. Given heavy debt burden as well as the power to print money, the German government indulged in seigniorage.

The ability to print money might be cool but be careful, if you printed too much money, you might end up poorer, as the German learned in the 1920s. The German not only learned a lesson or two about inflation — they learned it the hard way.

In 1923, one US dollar was equivalent to 4.2 trillion mark. No. I am not kidding. That is 4,200,000,000,000 mark; 4.2 x 1012 mark. Imagine, if you lived in Berlin in 1923, you would have to use scientific notation to buy a sack of flour. And converse in German to boot!

And oh shit, imagine the (nominal) cost of roses on Valentine! Inflation on top of inflation cannot be good news.

Further, the nominal interest rate stood at around 900%. For comparison purpose, as of February 2007, the Malaysian nominal interest rate is 3.5%.

The funniest thing is, since prices across the board were raising so fast on daily basis if not on hourly basis, the central bank could not print out enough money to make life a little bit simpler for the Germans. In fact, there is one famous picture that depicts how bad inflation was back in 1923:

Public domain.

On Wikipedia: “A German woman feeding a stove with currency notes, which burn longer than the amount of firewood they can buy.”

Suffice to say, I do not think a person could buy dirt with the mark in 1923.

Some time in the same year, the German government which got tired of probably raising the interest rate almost daily — while the people got tired of running from the banks to the stores just to make sure 4.2 x 1012 mark would still be 4.2 x 1012 mark an hour later — replaced the heavily inflated mark with a new mark. Those outrageous zeros were slashed. While the Venezuela is cutting three zeros, the German cut 12. The new regime brought sanity back to an insane monetary roller coaster ride.

Apart from that, the new mark was anchored to real assets, which, I do not think is true for the Venezuelan bolivar. Because of this — this is the only policy tailored to fight inflation — and the reputation of Venezuelan central banking, I believe that the problem Venezuela is facing would not end anything soon. Reputation is important in the fight against inflation. Given how populist the Venezuelan government is right now, I doubt the central bank — which I assume has no independence on monetary policies — would have the stomach to fight inflation.

Apart from that slashing of zeros, there are other efforts aimed to fight inflation. For instance, Venezuela is cutting down taxes to fight inflation:

Chavez said VAT will first be reduced on March 1 by 3 percentage points and then by a further 2 points on July 1. [Reuters, Feb 15 2007]

And to promise to introduce new taxes to replace the old taxes:

To compensate for the income loss, Chavez, a proud socialist, said the government will create new taxes, including one that could involve the private property of the rich. [Reuters, Feb 15 2007]

With the removal of VAT, prices could fall but it remains unclear what the net effect would be as, as stated in the first Reuters’ article, price could increase with the slashing of zeros. The price increase is similar to the effect of abolishing the pennies.

Moreover, the abolition of VAT encourages consumption, which could lead to demand-push inflation. I am unsure what the net tax shift would be though.

Right or wrong nevertheless, Venezuela will be an exciting economy to watch from far.

Categories
History & heritage

[1105] Of a brand new RM12.8 million Fort A’Famosa

RM12.8 million could buy more than 6 million plates of nasi lemak for a nationwide gathering. Or 1,280 World of Warcraft-friendly computers. Or support the Malay College for roughly two years at its current state. Or support more or less 29 full time students at the University of Michigan for four years. Or, it could be used to reconstruct the fort that was built by the Portuguese in the 16th century, strengthened by the Dutch in the 17th and the 18t century and dismantled by the British in the 19th century, the Fort A Famosa. Come the 21st century, here comes the Malaysian to raise the dead fort!

Yes. The federal government of Malaysia is planning to reconstruct the old fort and it is allocating resources so huge that it could buy 6 million Malaysians with free nasi lemak:

MALACCA: The federal government has approved a RM12.8 million allocation for the reconstruction of Fortaleza D’Malacca or the mighty A’Famosa fort built during the Portuguese or Dutch colonial era in Bandar Hilir here.

Culture, Arts and Heritage Minister Datuk Seri Dr Rais Yatim said said the first phase of the rebuilding work was expected to begin in April or May. [The Star, Feb 18 2007]

It is an odd thing to see the federal government is more interested in rebuilding what has been lost and not save those that have yet to be lost. With that RM12.8 million, it might be possible to entice the owner of the land the Bok House once sat upon to sell it to the public for conservation purposes.

Would the dear minister think the reconstruction of the old fort would qualify Malacca entry into the UNESCO World Heritage list?

Well, whatever the answer would be, if the federal government goes through with the plan, I hope the reconstruction would not damage existing historical buildings.

Categories
Activism Environment

[1104] Of where is the Nisshin Maru?

Despite being crippled in the Southern Ocean and amid the possibility of an environmental disaster in Antarctica, the Japanese whaling factory ship Nisshin Maru is still refusing Esperanza’s aid offer. Ocean Defenders has an animation regarding the current situation.

If you feel the Japanese should accept the aid offer, please write an email to the Japanese Environment Minister, Masatoshi Wakabayashi. I know it is not much but at least, it is something.

Categories
Politics & government

[1103] Of Krugman says Hillary needs to admit mistake

Paul Krugman of the New York Times is reminding Presidential candidates, especially Hillary Clinton of the need to admit mistake (via):

But back to Mrs. Clinton’s problem. For some reason she and her advisers failed to grasp just how fed up the country is with arrogant politicians who can do no wrong. I don’t think she falls in that category; but her campaign somehow thought it was still a good idea to follow Karl Rove’s playbook, which says that you should never, ever admit to a mistake. And that playbook has led them into a political trap.

For those that have not been following the current race for the 2008 Presidential election, the New York senator is under attack for refusing to admit mistake for authorizing the invasion of Iraq. As in right now, John Edwards and Barack Obama are in one way or another on the offensive as far as Iraq is concerned. That is very unlike what Hillary Clinton is experiencing right now.

Categories
Society

[1102] Of a xenophobic bill

Thanks to Chinese New Year, a typical weekend became a four-day holiday for many in Malaysia. According to several sources including TV3, foreign laborers flooded Kuala Lumpur for recreational purposes on Sunday. In the news reports, locals expressed discomfort of seeing foreign laborers walking around so freely in large number. I thought it was normal for the locals to feel some discomfort and since I have blogged about such xenophobia earlier, I decided to let it go. When I saw a post by The Malaysian which quotes the International Herald Tribune however, I changed my mind. In the IHT:

KUALA LUMPUR, Malaysia: Foreign laborers in Malaysia’s largest city denounced Monday proposed legislation that would restrict them to their work sites unless they receive special permission to leave.

Home Minister Radzi Sheikh Ahmad said he intends to propose a bill next month that could see nearly 2 million foreign workers in the Southeast Asian nation confined to their living quarters, the Star newspaper Web site reported Sunday.

The bill is xenophobic and must not pass. We are talking about humans here, not dogs.

If the bill goes through, then Malaysia must be prepared for rocky relationships with several countries which will inevitably include our neighbor, Indonesia.

Further in the report:

Police Chief Musa Hassan said foreign laborers may be restricted to their living quarters and their “activities monitored” as part of efforts to curb crime. Musa said 5,000 crimes were committed by foreigners last year from a total of about 230,000.

And:

“It is a way to prevent those employees from committing crimes,” he said adding 2% of the crimes committed in the country are by foreign workers.

Based on the statistics, if we are really concerned about crime rate, we should restrict the locals instead. But no, there are those that are encouraging the Mat Rempits to disregard the law in the name of fighting crime:

BALING: Putera Umno will reward Mat Rempit here with motorcycles for helping police detain snatch thieves.

Its chief Datuk Abdul Azeez Abdul Rahim said the incentive was one way of curbing snatch thefts in the Baling district and to encourage the illegal racers to be police informants.

However, he added, before the Mat Rempit could take home the motorcycle, they would have to catch at least 30 snatch thieves and be rewarded RM50 per head.

A great policy from a person whom “graduated” from the “prestigious” “Preston University“. For more on Abdul Azeez Abdul Rahim, please read an article by Joceline Tan.

In the end, are we as a society being honest here?