2021.09 The Taiwan Banker NO.141 / By Hank Huang (黃崇哲)
New Prescriptions for the Old Symptom of InflationEditor's Note
Anyone who has studied economics should still remember from their exam questions about income, wages or interest rates to pay attention to the distinction between nominal and real values. Inflation must be deducted from nominal figures to get the real amounts, and price increases have become the key to properly understanding standard of living. For this reason, one of the most important tasks of all central banks has always been to adjust interest rates to change the supply of money and keep prices stable. In the past, “price inflation” and “monetary inflation” were synonymous, but since the start of the 21st century, the distance between them has begun to widen. In order to boost the economy or meet financing needs, developed countries have expanded their currency issuance, but the result has been contrary to textbook economics. Price increases have been quite subdued. This peculiarity has thrown economists and forecasters for a loop. In one clear exception to the theory, Japan racked its brains to create inflation through the “three arrows” of Abenomics, yet deflation persisted. The main explanation for this result is that expectations about inflation have completely changed. The psychology of expectations is the most important factor affecting price trends. Therefore, as scholars still try to run models from past data to find answers, they forget that economic habits have completely changed. We need to consider the economy from a more comprehensive perspective. A new sort of economics which looks at social structure, living habits, and even family patterns is required. After all, in the past, economics was driven by the generations who experienced world wars and hyperinflation. In today’s Taiwan, in contrast, the oldest generation of post-war baby boomers have the most assets, but their tolerance for investment risks is low. In the face of inflation, they would rather still store wealth in cash and fixed deposits. The X and Y generations, who are the main force of the economy today, watched prices of durable goods like TVs and refrigerators fall continuously; meanwhile wage growth has stagnated. Besides housing prices, they have long been free from fear of soaring cost of living. For the latest generation of digital natives, lack of savings and consumption on credit have become the norm, and they are even more insensitive to fluctuations in interest rates. All of this, plus the economic patterns of globalization and automation, are very different from during the Keynesian era. Therefore, should we go beyond the traditional indicators and respond with an updated attitude in response to inflation? In the new era, while worrying about the end result of money printing, we should no longer blindly hope for stable prices and wages, letting the money from quantitative easing flow to the stock and housing markets, making a fuss about the price of braised pork rice increasing from NT$ 5 to NT$ 10 while celebrating new stock market highs and a housing market boom. In other words, while calculating price stability, we should also care about social distribution and sustainability. For example, facing rising housing prices, we can allow wealthy people to collect apartments, but levy full and fair housing and land value taxes. At the same time, a higher vacant house tax rate would provide the financial pipeline for county and city governments to finance construction of social housing, meeting the housing needs of disadvantaged groups while meeting the virtual investment demand of the wealthy in cement space and toilets they don’t use. A new overall economic strategy with a more ESG attitude may be the best prescription for the old symptom of inflation.