UNCONTROLLED MONEY SUPPLY IS INFLATIONARY AND HARMFUL


The call has been made by the Opposition and others for the doubling of the pension for senior citizens, a substantial increase in public service salaries of 20 percent and a reduction of VAT, in addition to the income tax threshold which has been increased. These are commendable sentiments and should attract the support of everyone. Unfortunately the full facts about the negative impact of such large increases are not and have never been placed before the same sections of the community for whose benefit the increases are demanded. Increases of the magnitude demanded, especially if the salary increase is not backed by an increase in productivity, would be inflationary and would harm most the groups who the increases are intended to benefit.

Inflation is the measure of the general rise in the prices for goods and services over a period of time. It is caused by an increase in the money supply among other factors. The increases being sought by the Opposition, if granted, would substantially increase the money supply in the economy. The rate of inflation would increase significantly. The end result would be that the initial positive effect of increases in pensions and salaries would be eliminated by the subsequent higher cost of living caused by increased inflation. This would naturally lead to demands for even higher increases thereby leading to a vicious inflationary cycle.

Those who are calling for these substantial increases have not mentioned inflation or said how they will deal with the inflationary pressures which would be unleashed by the increases. In withholding the negative potential implications of the increases sought, they are being less than candid with the intended beneficiaries of their advocacy.

Hyperinflation in two different eras, in Germany in the early 1920s and in Zimbabwe in the late 1990s and early 2000s, arose from the same cause – economic difficulties resulting in the printing of money to pay expenses. During the 1980s and 1990s Brazil experienced a high rate of inflation combined with slow economic growth. One of the major factors that intensified the inflationary pressures was the indexing of wages to the rate of inflation. In Venezuela inflation has been raging at 25 to 30 percent. It has been argued by many that the inflation is fuelled by spending on social programmes and increases in salaries to meet rising cost of goods and services. The Government denies that and suggests that it is caused by speculation. Guyana experienced severe inflation during the late 1980s due to devaluation of the Guyana dollar which resulted in substantially increased prices and the impoverishment of lower middle class and working class Guyanese from which they are still recovering. There was another spike in inflation in the early 2000s after the large increases in public service salaries over a three-year period awarded by the Armstrong Commission.

During the 1970s the US Federal Reserve was forced to raise interest rates, thereby restricting the money supply, because of high inflation following the Vietnam War. It led to stagnation of the US economy. The conquering of inflation, and other factors of course, facilitated stable economic growth with low inflation during the 1990s. The low interest rates allows for a greater money supply and thus greater investment possibilities. The challenge therefore is to maintain low inflationary pressures while at the same time encouraging economic growth. For Guyana, which already has a high borrowing rate, inflationary pressures can only be reduced by even higher interest rates and reduced Government spending which would devastate the poor and increase unemployment. Our economy would go into a tailspin.

If the Government of Guyana were to accede to the demands of the Opposition the country will quickly face substantial inflationary pressures which will quite quickly wipe out the benefits gained by those who initially benefited from the increases. And those pressures will not stop. They have a tendency to spiral so that the triggering of inflation will require measures to reduce it. For Guyana, which already has a high borrowing rate, inflationary pressures can only be reduced by even higher interest rates and reduced Government spending which would devastate the poor and increase unemployment. Our economy would go into a tailspin.

Senior citizens, public servants and other lower paid workers who make up a substantial portion of the electorate and of the electoral support of the Opposition have not received these explanations. Surprisingly, this argument has not been raised by anyone on the Government side so far during the budget debate. The Government has offered  no analysis of the impact of the Opposition’s proposals so as to inform the public as to the expected inflation rate which would result from the increases demanded, the effect that it would have on the cost of living for the pensioners, public servants and public as a whole and the negative consequences for the economy.

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