J. Soedradjad Djiwandono: Racing Up For Low

Racing Up For Low

By: Prof. J. Soedradjad Djiwandono, Ph.D., Emeritus Professor of Economics, Faculty of Economics and Business, Universitas Indonesia, and Adjunct Professor of International Economics, S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University (NTU), Singapore

 

Independent Observer – (17–23/6/2022) It has been reported that the US inflation rate, which was 8.5% in May, measured annually, has aroused worry in the market. The usual moves of ‘flight to safety’ have been happening everywhere, the declines of stock prices against a reverse with gold prices rising. Fed Vice Chair Lael Brainard indicated that in the next meeting the Fed would decide on raising fed funds rate by half a percentage point, with another increase scheduled for September.

In the meantime, in answering critics that it has been lackadaisical in fighting inflation, the ECB indicates that, as announced by its President, Christian Laggard, it will raise its rate by a quarter of a per cent. And this will be followed by another rise of half a percent i n September. Two major central banks of the world have resolved to fight rampant global inflation. It is safe to say that others will follow soon.

Meanwhile, from the spending side, increases have been continuing for domestic purposes as well as the Ukraine war, as the Biden Administration continues to ramp up aid with armaments and humanitarian materiel. President Biden has to bear the brunt of this budget development, which results in inflation even from the employment side, as job openings keep growing healthily.

Global inflation has been spearheaded by the surges of oil and gas prices, due partly to Russian answer to the economic sanctions that the US and its western allies use against Russian invasion of Ukraine. The gasoline price in the US has been near or over USD 5.00 a gallon lately, even USD 6.00 a gallon in California. This in combination with food prices, due to decrease of grain exports from Russia, have been called major reasons of the US inflation, which at 8.5 percent in May is the highest since 1981. The interest rates hikes will also be accompanied with resales of financial assets these two central banks hold to ensure the tightness of their monetary stances. The raise in interest rates could only result in lower growth soon. Therefore, I have chosen a strange title for this column: Racing up for low.

Significance for the Rest of the World

So, what could we expect to happen in the rest of the world economically? The immediate reactions in the markets have been clear: prices of stocks tumble in capital markets, and inflation also creeping up everywhere. Cost of borrowing is rising, raising the burden of debts of countries which already had high debt levels; this will load on an additional burden for governments’ budgets and corporations. And growth rates will be down globally for sure.

This is not a story about the end of the world, but for sure there are concerns for all governments.

Meanwhile, it is sad to read about President Putin’s views on this development. First, he keeps saying that the rampant inflation of the world has nothing to do with what he did to Ukraine; instead, it is them is take of the U S government and its western allies. But more bizarre is the story that, not just like what I wrote in one of my past columns, that he was still living in a dream of Soviet Union of the past, and wants to revive it, started with Crimea, now the whole Ukraine if possible. Apparently, he even likens himself to Peter the Great, the Russian Tzar of the 18th century, according to Sarah Rainford in her recent writing. From the Russian history we read that Peter the Great successfully developed Russia in education, science, and other things to catch up with the western world during his reign. But equalizing to Peter the Great achievements is beyond me thinking about President Putin.

President Putin’s dream aside, the major issues before many countries, developing, emerging and those in middle income group such as Indonesia, are real challenges indeed. No country could afford to ignore this phenomenon; those who already have a large burden of foreign currency-denominated debts. We cannot continue saying that our debt level is still safe, when our international reserves are not that ample, and for Indonesia, pardon me for keep repeating this, when our tax ratio is only 9%, the lowest among the ASEAN countries.

 

Source: Independent Observer. Edition: June, 17-23, 2022. Rubric Opinion. Page 6.