Hong Kong’s Vicious Inflation Cycle

Even supposed free market economies are susceptible to the follies of “free lunch” politics

From the Bloomberg, (bold highlights)

Hong Kong’s financial secretary caved in to protests over plans to bolster residents’ pension funds, opting to hand out cash and tax rebates that a week ago he said would stoke inflation.

John Tsang said he will give HK$6,000 ($770) to permanent residents aged 18 or above, abandoning a Feb. 23 budget plan to inject the same amount into their pension fund accounts after polls showed the government’s popularity slumped. The government also plans to give the 38 percent of the workforce that pays income tax a 75 percent rebate capped at HK$6,000.

“The fact that half a year of hard work preparing the budget can be thrown away and started again shows populism and not rationality dictates the policy-making process,” said Ivan Choi, a lecturer at the Chinese University of Hong Kong’s government and politics department. “The government will pay for the damage done to its integrity.”

Political parties attacked Tsang for failing to do enough to alleviate the impact of soaring food and housing costs. Asian governments are grappling with inflation fueled by rising commodity costs and capital flows from developed economies drawn by the region’s faster economic growth.

Tsang said when he announced his budget a week ago that battling inflation and getting ahead of a property bubble are his government’s main tasks this year. The cash handouts and tax rebates will cost the government about HK$40.5 billion, a government spokesman Patrick Wong said today. The pension handout was to cost the government HK$24 billion.

Politicians and the bureaucracy always attack the symptom rather than the cause. Politicians and the bureaucracy will not address the primary cause which is the inflationist “bubble” or “wealth effect” policies implemented by both the Hong Kong government and the implied transmission of the US Federal Reserves policies via the US pegged Hong Kong Dollar.

And inflation will be fed by more inflation, which eventually will be countered by price controls leading to more imbalances, and more political accommodation via inflation—until the whole process implodes.

This is just another example depicting how central planning, whether executed by the government or the central banks, does not contribute to the upholding of free market principles.

As the Ludwig von Mises wrote,

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.

The Santa Claus principle will end with the collapse of the present monetary system.