Malaysian interests: Inflation and recession are important issues in GE15. – AZMAN GHANI/The Star
MORE than one million 18- to 20-year-olds will be voting for the first time in the 15th General Election (GE15).
Do they know about the many critical issues facing us? Do they understand the complexities of governance, politics, economics, and social and climate change challenges? Will their voting decisions be based on clear analysis?
Inflation and recession are hot issues in GE15 yet many youths are not aware of the complexities involving these topics.
Inflation means a general rise in the price of goods and services. But to understand it, we must first understand the role of money.
What is money? The definition and measurements of money supply vary by country.
For example, in the United States, M1 includes currency in circulation, travellers’ cheques of non-bank issuers, and demand deposits; M2 includes M1, plus savings deposits and money market deposit accounts, time deposit accounts, and mutual funds; and M3 includes M2, plus other less liquid instruments.
It is also important to know the core functions of money. As a medium of exchange, money solves the barter problem; as a measure of value, it creates the price system; as a store of value, it makes saving and the giving of loans possible; and it allows for deferred payments.
So what are the economics of inflation and the role of money? An economic system comprises production, distribution and consumption. Different stakeholders are involved in this process. But all are facilitated by the role of money.
Inflation can destroy the delicate balance of production, distribution and consumption, and the facilitating function of money. When these are not aligned, the economy becomes dysfunctional.
In recent years, inflation has become a critical concern due to several factors.
The Covid-19 pandemic in early 2020 disrupted the supply chain and the global economic system, especially in the food and energy sectors which created the inflationary momentum.
Speculative consumer behaviour worsened the situation amid adverse weather conditions wreaking havoc on food production worldwide and global uncertainties brought on by the use of critical energy supply by warring nations.
Generally, economists agree that it is the increase in money supply that causes inflation.
For example, between 2008 and 2021, the basic money supply of the US exploded from US$830bil (RM3.9tril) to US$6tril (RM28tril).
Recently, the US inflation shot to a new four-decade high of 8.5 per cent from a year ago. The United Kingdom and the European Union are in a mess.
Some countries with bad governance suffer from hyperinflation. In 2021, the interest rate in Argentina was 38 per cent and the inflation rate was 51 per cent per annum.
Inflation is bad because it is like a “stealth tax”. It punishes those who earn fixed incomes like pensioners. But the rich know how to exploit these inflation opportunities and thus benefit from them.
This leads to “inflation inequality”.Governments also benefit from reaping more taxes as inflation pushes certain groups into higher taxable brackets, although their real incomes have decreased.Inflation has destroyed many nations. It destroys social trust, and increases inequality and poverty.
The long-term growth of the economy is also affected by the smaller inflow of foreign investment to finance economic growth.
How do we control inflation? Policy experiments such as direct interventions, price controls and the use of various monetary policies have recorded varying success results.
In fighting inflation, monetary policy – particularly the raising of interest rates with the aim of reducing consumption and investment – is the main tool.
Other complementary policies are also used to reduce purchasing power. T
he danger is that this will result in stagflation.
If a high interest policy continues to be used in the major economies, then it is most likely that this will impoverish many smaller economies.
The US is using interest rates to gain investment capital from other countries.
This has adverse impact on the growth of the less developed economies.
As the US dollar is the global medium of exchange, other countries are trapped in this boom-bust cycle with almost all other currencies depreciating significantly against the US dollar.
Many economists are advocating the shift from fiat money and a return to the gold standard, or variants of the gold standard with cryptocurrency.
This creates stability in the purchasing value of each currency.
From the 1950s to the 1970s, there was a long period of stability and growth when the US dollar was pegged to gold.
The average inflation rate in Asean countries is now more than five per cent.
The Asean central banks may have to raise interest rates, but not as aggressively as in the Western economies. As Asean economies are still weak, complete reliance on high interest rates will not be effective.
Other strategies to stabilise skyrocketing food and energy prices are important. If delayed, political and social unrest could result.
Many Asean currencies are also depreciating against the US dollar, making vital imports like food and technology, expensive.
Studying abroad is very costly now.
High US interest rates also encourage capital outflow and reduce foreign investment, further weakening recovery prospects and nation-building efforts as grooming talents and acquiring new technologies are more difficult.
If Asean is dragged into the rift between the US and China, all economic and investment decisions will be further complicated.
As Malaysian youths head to the polls, these are the important issues they have to take note of.
With some basic understanding of inflation, our young voters will have a better grasp of the core issues that are impacting the nation, and they can objectively and critically assess what is happening here and what our government is doing to protect our present interests and future assets.
Youths, especially those casting their votes for the first time, must ask politicians relevant questions about how we, as a nation, will respond to these regional and global challenges.
And they should accept nothing less than intelligent answers and workable proposals in return for their votes.
Prof Datuk Dr Paul Chan is the co-founder, vice-chancellor and president of HELP University (Malaysia). The views expressed here are the writer’s own.
