[Vnbiz] Inflation Control

[Tran Dinh Hoanh]

Dear Brother Hao & CACC,

Now that we almost have complete picture, the question is "What cause all
this?

One obvious cause is the depreciation of the USD on the world market, which
makes the VN Dong appreciate in value in comparison, which makes the Central
Bank nervous about export and therefore makes the Central Bank pump more
Dong into the circulation, which creates (or increases) inflation.

The other possible cause is the deficit in the trade balance deficit (about
1 billion USD for Jan 2008.  See
http://vnexpress.net/Vietnam/Kinh-doanh/2008/02/3B9FEDC7/ ).   Last year, we
had a large trade deficit also, didn't we?  What is the number?

Are  there any other causes for increase in inflation that we know?

If we can list all the possible causes, then we may be able to examine them
to see what causes are real and what are imaginary (in the mind of some
policy makers only), and then we may be able to determine what to do to
solve the real causes (and to make a judgment whether the measures being
done by the Central Bank are appropriate).

Please chip into this exercise, brothers and sisters.

Hoanh

______________

On Sat, Feb 23, 2008 at 3:10 PM, Quach Manh Hao <quachhao at gmail.com> wrote:

> [ Vietnam Business Forum ]
>
>
> Anh Hoanh,
> I agree with your comments, conditional on your assumption: high interest
> rate would not cause any decline in inflation. The empirical evidence from
> what I acknowledged so far is: if the the rate of inflation is favourably
> low, this high interest helps reduce inflation. But if it's high or affected
> by psycological factors, it does not work. Further, if we analyze a bit more
> in details, anh Hoanh's analysis seems to favour the cost-push inflation
> while the policy makers are deemed to beleive in the demand pull inflation.
> I don't have any research on this, but my feeling seems to be
> both. But, clearly, if a panic occurs in real estate and construction, we
> could face a serious recession. So, my guess is the government cannot be too
> strong on the force of monetary control. They may target the long, but must
> be realistic with the short goals.
> Cheers,
> Hao
>
> On Sat, Feb 23, 2008 at 2:48 PM, Tran Dinh Hoanh <tdhoanh at gmail.com>
> wrote:
>
> > [ Vietnam Business Forum ]
> >
> >
> > Dear brothers Hao & Tuan and CACC,
> >
> > Thanks for the quick responses, bros.  Let me capture the situation so
> > far, incorporating brother Hao's and brother Tuan's input into the large
> > picture.
> >
> > The Central Bank of Vietnam has pumped more Dong into the market
> > (probably by buying the UDS) to keep the USD dollar artificially high
> > against the Dong, hoping that it would help Vietnam export.
> >
> > The additional Dong in circulation, in turn, has generated inflation (or
> > at least helped inflation).
> >
> > To reduce the Dong circulation (to reduce the inflation pressure), the
> > Central Bank ordered commercial banks to buy treasury notes.  This forced
> > purchase of treasury notes has dried up the banks' liquidity (i.e.
> > Dong).
> >
> > The Central Bank has also increase interest rates on the Dong (in
> > January of this year) probably to "reduce the Dong circulation and therefore
> > reduce inflation pressure".  (Please read in Vietnamese
> > http://vnexpress.net/Vietnam/Kinh-doanh/2008/01/3B9FEEC3/ ).
> >
> > Banks, having no money for lending, have reduced real estate loans.
> > This may soon lead to a drought in the real estate market and the
> > construction industry.  (Please read in Vietnamese
> > http://vnexpress.net/Vietnam/Kinh-doanh/2008/02/3B9FF6D5/ )
> >
> > Because of the shortage of the Dong and because the Central Banks has
> > increased interest rate on the Dong, banks have also increased interest
> > rates, which lead to many withdrawals by saving account holders to switch
> > banks, shopping for higher interest rate on their savings.  (Please read in
> > Vietnamese at http://vnexpress.net/Vietnam/Kinh-doanh/2008/02/3B9FF85C/ ).
> > OF course, higher inerest rate also hurts the real estate market and the
> > construction industry.
> >
> >
> > That is the situation so far.  The order of appearance I have up there
> > is roughly, but not strictly, the chronological order of all the events.
> > But I think this point is not crucial, since all the events affect each
> > other like in a circle, regardless of what happens first.
> >
> > So, what do we have now?
> >
> > 1.  We have higher interest rate, which may increase inflation ( and not
> > reduce inflation).  High interest rates usually bring higher prices because
> > (1) producers of products and services have to pay higher interests on their
> > operating loans and (2) psychologically, in the Vietnam I know, every time
> > people hear about "higher interest" they panic and increase prices.  (So the
> > theory that "higher interest rate may reduce the money circulation and
> > thefore reduce inflation" may not work at all in Vietnam).
> >
> > 2.  We have the Dong circulation dried up because of the forced purchase
> > of treasury notes.  This may dry up the real estate market and the
> > construction industry, which may precede a recession.  But the recession may
> > increase inflation (instead of reducing inflation as recession usually
> > does), because the volume of services and products (in real estate and
> > construction industry and related "beneficiary industries") will go down
> > with more people without jobs, while the money circulation is still the
> > same.
> >
> > 3.  We have the Dong circulation essential the same (I am not sure the
> > same or a bit different), because the Dong pumped in by the Central Bank
> > have been absorbed by commercial banks when they were forced to buy treasury
> > notes.  So, the Dong value compared with the USD is essential the same.
> > Whatever the Dong's appreciation the Central Bank has achieved will
> > disappear immediately because the money exchange rate is extremely sensitive
> > to the supply and demand of the market.  You cannot fool the exchange market
> > at all.
> >
> > 4.  In the meantime, the inflation that was caused by the Central Bank's
> > pumping money into the market has occured and won't go away soon, because
> > inflation is less sensitive to the market and more sensitive to psychology.
> > Once inflation has already happened, it may take a while to disappear even
> > if we do all the right things.  Once sellers have increased their price
> > because of inflaion, they are very reluctant to go down.
> >
> > 5.  In addition, the "interest crisis" at the banks and lending
> > institutions may feed more into the inlfation psychology.  Actually if
> > inflation continues to rise, saving customers will withdraw their savings,
> > not to switch banks, but to buy gold to be safe.  Which wil make inflation
> > much worse.
> >
> > Am I on the right track so far?
> >
> > Hoanh
> > ____________
> >
>
-- 
Tran Dinh Hoanh, Esq., LLB, JD
Washington DC
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