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Everybody hates the fact that prices are going higher.
There is no question that price increases are
outstripping income, at least in my household. Each day
seems to bring new challenges to preserve purchasing
power through substitution (DVDs instead of the cinema),
conservation (it’s raining, you don’t need the air con
on!) and elimination (try my new recipe for lechon
bangus).
There
are two general causes of inflation: People get too much
money too fast and are going on a buying spree,
increasing demand for products and causing prices to go
up because there are not enough goods to meet the
demand; or there is suddenly a shortage of an item and
that drop in supply causes prices to rise in the face of
a constant demand. Too much demand or too little supply,
and you have inflation of prices.
Over
time, though, supply and demand come back in balance and
the net result of temporary inflation can be a positive
development.
If an
increase in demand causes inflation, then the product
providers will find ways to increase production, perhaps
in part through more efficiency and innovation, and that
is good for everyone. Better products at a lower price
could result. Supply problems that increase prices may
result in consumers looking for substitute products,
such as in the case of alternative and renewable-energy
sources. A rapid increase in the price of cotton created
a new industry in the late 1970s: garments made from
polyester.
Governments can create inflation another way by rapidly
increasing the money in circulation through various
methods, thereby decreasing purchasing power by way of a
debased and domestically devalued currency. This is not
applicable to either the current situation or the
Philippines, specifically.
Look
through virtually any economics textbook and you will
not find any substantial classic inflation theory about
the cause of the inflation that we are experiencing
right now. This is a period of speculative inflation.
Speculative inflation is a phenomenon that happens when
prices go up outside of the factors of demand from
consumers or the supply from the producers. The great
examples of speculative inflation have occurred in the
stock market, as in the United States in 1929. The prime
example was the tulip mania in
Holland
during the early 1600s.
The
tulip mania started as the Dutch economy was coming out
of the horrors of the Black Plague. The public wanted
the flower, increasing demand and pushing prices higher.
Then buyers stopped at nothing to get the flowers, not
because they wanted to own tulips, but only because they
thought prices would go higher. The result was a
speculative inflation-feeding frenzy.
As in
the instance of the stock-market crash of 1929, the
tulip-mania participation and subsequent collapse was
limited to a few individual players, mainly the richer
classes with, in the big economic picture, a relatively
small amount of funds.
Ninety
percent of the world’s sales transactions for oil, rice,
wheat and corn are not between the producer and the
end-user. These transactions take place on the
commodity-futures exchanges where a piece of paper
representing the product is bought and sold. A “barrel”
of oil produced in Kuwait may be bought and sold dozens
of times, each time at a higher price, before the
physical oil is delivered to a refinery in Singapore, to
be made into gasoline then shipped to the Philippines
and into your car. And the pump price of your gasoline
reflects all the profits made by all the speculators
between the oil well and the gas station.
Economists, always slow to catch up to the real world,
have not factored this speculative inflation into their
models. It has only been in the last 10 to 15 years that
the amount of money in the speculative markets has
become so large as to substantially influence end-user
prices. We are talking of hundreds of billions of
dollars of transactions every day. The dollar value of
futures contracts traded currently exceeds by many times
the dollar value of common stocks traded on all
US
stock exchanges.
Global
wealth creation, the rise of instant communication and
more sophisticated investment strategies created both
the means and the method of global futures-market
investment. Never in history have we seen this massive
amount of money available for investment speculation.
And because of the world’s investment markets being
joined around the clock primarily through the Internet,
speculative investment has become the 800-pound crazed
gorilla in the world’s economic living room. No one is
sure how it got there, no one is sure how to ask it to
leave, but everyone is feeling the effects of its visit.
However,
as with all frenzied speculative investment manias, this
current one will burst, too. We saw it happen in the
1990s dot-com investment boom. We just saw it in the
US
housing and credit markets. And we will see it happen in
the commodity markets.
In 1635
one tulip bulb sold for 6,000 florins, the same price as
60 tons of butter or 200 fat pigs. By the end of 1637,
the most famous and valuable bulb, the Semper Augustus,
cost less than 100 florins.
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