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Issue To Watch: Halloween, Inflation, and the Quantity Theory of Money<\/strong><\/p>\n by Wayne Forrest<\/em><\/p>\n We\u2019ve just experienced a Halloween in which frightful fantasies become reality as\u00a0 the young seek happiness, expecting they are protected, but they are not. \u00a0Who knew that the American costume and candy holiday (at one time it raised funds for UNICEF) had become international and it could lead to the trampling of 151 in a Korean alley during a Halloween \u201cmeet-up\u201d. Hindsight is 20\/20, but surely more protection could have resulted in less pain and death. But does the same hold true for economies? Can governments protect us from \u201cscary\u201d inflation and high prices and why is Indonesia’s much lower than ours?<\/p>\n I admit some trepidation in wading into this complex topic, being a layman. So, beyond refreshing my understanding of the macroeconomics of John Maynard Keynes and Milton Friedman, I also turned to, of all people, Jon Stewart, the former host of The Daily Show. \u00a0His recent podcast on inflation featured Steven Hanke, Professor of Applied Economics at Johns Hopkins, whose work on national indicators, currencies, monetary supply, and many other topics goes back decades. \u00a0The last time Hanke came into view with Indonesia was during the Asian Financial Crisis of 1997-1998. At that time Indonesia\u2019s currency was rapidly depreciating and Hanke held discussions with President Suharto\u2019s economic team about installing a currency board as a stop gap measure. The plan \u2013which has had success in other countries\u2014was dropped after IMF and the US government raised objections. I well remember AICC banking members also didn\u2019t believe Indonesia could pull it off. In 2005 Hanke wrote a compelling article restating the case.<\/p>\n Stewart and Hanke seem like polar opposites, but actually they agreed on one important thing, the Fed has been wrong on its approach to inflation; it’s way too interventionist. Hanke argues convincingly, that inflation has a positive correlation with money supply, an idea which the Fed, and its chairman do not. Stewart\u2019s issues with the Fed have to do with its interest rate policies being overly generous to business. For Hanke its all about the quantity theory of money (QTM), an idea it turns out, that\u2019s been around since the days of Copernicus, the ultimate Renaissance man, and later taken up in different ways by the likes of John Stuart Mill, David Hume, Karl Marx, Keynes, and Milton Friedman. The essence of QTM is the general price level of goods and services (inflation) is directly proportional to the amount of money in circulation, or money supply.<\/p>\n On the podcast Hanke basically presented the following arguments:<\/p>\n On energy price hikes Hanke brought up Japan during the first OPEC price increases in 1973. Facing large increases in oil prices the Bank of Japan increased the money supply (MS) but general inflation still rose. In 1979, when prices went up again, they had learned from their mistake, didn\u2019t grow MS and they had much less inflation. Hanke cautions us not to listen to the “noise” in the media about relative rise in commodity and supply chain prices when\u00a0the real culprit (“signal”) is the large increase in the money supply.<\/p>\n Of course, Hanke and his fellow strict monetarists have their critics (Keynesians) -I won\u2019t go into the weeds to present them-but I reflected on his theory when looking at Indonesia\u2019s current experience. Its inflation (even with rising food and energy prices and a devaluating currency) was below 2% from February 2020 until January 2022, has been above 4% only since June, and is currently 5.7%. \u00a0The reasons are instructive. Indonesia\u2019s central bank only once during the pandemic stepped in to buy government bonds, unlike the Fed. The government bought the \u201cprice rises\u201d through subsidies and direct social assistance. They didn\u2019t always get it right, stumbling over cooking oil, but by and large the government has shielded its people from the hyperinflation afflicting countries like Turkey, Pakistan, Venezuela, and Argentina and the 8% levels in the EU and the US.\u00a0 Former Finance Minister, the US-trained economist Bambang Brodjonegoro, commented recently: \u201cYou cannot expect such an operasi pasar (market operation subsidies) to happen in the US, because in the US and in the EU, it\u2019s all based on market mechanisms. That\u2019s why the only ammunition from the US and EU perspective is the central bank.\u201d<\/p>\n Maybe Perry Warjiyo and his colleagues at Bank Indonesia know a thing or two about the quantity theory of money and maybe his colleagues at the Ministry of Finance understand fiscal policy, and kudos to President Jokowi and his team for stabilizing what could have been a much \u201cscarier\u201d situation.<\/p>\n [\/fusion_text][\/fusion_builder_column][\/fusion_builder_row][\/fusion_builder_container]<\/p>\n","protected":false},"excerpt":{"rendered":" [fusion_builder_container type=”flex” hundred_percent=”no” equal_height_columns=”no” menu_anchor=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” class=”” id=”” background_color=”” background_image=”” background_position=”center center” background_repeat=”no-repeat” fade=”no” background_parallax=”none” parallax_speed=”0.3″ video_mp4=”” video_webm=”” video_ogv=”” video_url=”” video_aspect_ratio=”16:9″ video_loop=”yes” video_mute=”yes” overlay_color=”” video_preview_image=”” border_color=”” border_style=”solid” padding_top=”” padding_bottom=”” padding_left=”” […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"elementor_theme","format":"standard","meta":{"footnotes":""},"categories":[23,7,102,11,101],"tags":[],"class_list":["post-4728","post","type-post","status-publish","format-standard","hentry","category-aicc","category-american-indonesian-chamber-of-commerce","category-hanke","category-indonesia","category-inflation"],"_links":{"self":[{"href":"https:\/\/aiccusa.org\/index.php?rest_route=\/wp\/v2\/posts\/4728","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/aiccusa.org\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/aiccusa.org\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/aiccusa.org\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/aiccusa.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=4728"}],"version-history":[{"count":4,"href":"https:\/\/aiccusa.org\/index.php?rest_route=\/wp\/v2\/posts\/4728\/revisions"}],"predecessor-version":[{"id":4732,"href":"https:\/\/aiccusa.org\/index.php?rest_route=\/wp\/v2\/posts\/4728\/revisions\/4732"}],"wp:attachment":[{"href":"https:\/\/aiccusa.org\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=4728"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/aiccusa.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=4728"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/aiccusa.org\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=4728"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n