Simon Black: The Canary in the Inflationary Coal Mine Is in the Southeast Asia

From Sovereign Man:

Laos is a small, landlocked economy in Southeast Asia that’s often overlooked in favor of its neighbors: Thailand, China, and even Cambodia. But there are a few important factors that set Laos apart and lead me to believe that, when it comes to inflation, the country is the canary in the coal mine.

First, Laos is one of the most sparsely populated countries in Asia; with just 6.3 million people, its numbers pale in comparison to regional neighbors such as Burma (50 million), Thailand (67 million) and Bangladesh (162 million).

The other thing that’s important about Laos is that the country is home to some of the most fertile soil in the world: more than 20% of its land mass is ripe for agricultural use. This is an astounding number, and it’s no wonder that agriculture makes up the preponderance of the Laotian economy.

Put another way, Laos, with its vast resources and small population, might loosely be considered an agricultural version of Kuwait. But Laos is nowhere near as wealthy, since oil is much pricier than rice, soy, and fish.

Given its resources, it certainly seems ironic that the prices of staple foods in Laos, including rice, have soared in recent months, and that the Laotian government is now under intense pressure to “do something” about it.

You expect this sort of thing to happen in Algeria, where the population is 35 million, where only 2% of the land is cultivated, and where agriculture makes up but a tiny percentage of the economy… but in Laos? This is akin to finding Kuwaitis unable to afford filling up their cars due to high gas prices. It’s unthinkable.

Thing is, it’s not that there are food shortages in Laos; this isn’t an issue where supply has failed to keep up with demand (thus resulting in rising prices). The price hikes are simply another indicator of monetary inflation causing severe price inflation, particularly in the developing world.

How does this happen? The trillions of new currency units being compulsively manufactured by central bankers are finding their way to developing countries. This surge heats up local markets, causing prices to rise.

This effect is compounded when developing markets fight to keep their currencies artificially depressed against the dollar. When the price of milk goes up by a dollar in the developed world, people grumble about it, but they can afford it. In Laos, where the minimum wage is about $65/month, an extra few dollars for groceries is unfathomable.

The government in Laos will most likely raise the minimum wage. The figure that’s being discussed is about a 40% increase from today’s level, which itself is nearly double the minimum wage in 2009.

Rising wages like this are a common ingredient in hyperinflation, spawning a vicious cycle of higher prices, which then beget higher wages, which then beget higher prices, and so on. Wage hikes are always playing catch-up with rising prices, and the end result is a reduced standard of living. No amount of monetary wizardry can prevent this.

I saw a similar case when I was in Sri Lanka a few months ago: the government there keeps the rupee fixed to the US dollar at an artificially low rate in order to support exporters… yet the weak rupee has hit the locals hard, causing soaring prices of 30% or more for staple foods such as rice and coconuts.

When I was in Zimbabwe recently, the locals told me similar stories about their days of hyperinflation: everyone was constantly getting a “raise” to keep up with inflation, but prices were adjusting so rapidly, their living conditions would constantly deteriorate.

Needless to say, banks do just fine in this situation. All the freshly printed money circulates through the banking system, generating greater volume and higher profits. It’s no coincidence that Laos’ largest commercial bank (BCEL) is expecting its net income to surge 27% this year, and I’ll be curious to see what happens to the Laotian stock market (which just had its inaugural session last week).

Bottom line: if this sort of thing can happen in Laos, where there’s about 2.5 acres of lush, fertile, arable land for every man, woman, and child in the country, it can happen anywhere… and I’ll be watching this situation very closely to see if any civil unrest develops as a result.

Regardless, inflation is here. And the more you see politicians and central bankers denying it, the more you should be preparing for what may come. More to follow.

http://www.sovereignman.com/expat/the-canary-in-the-coal-mine-is-in-southeast-asia/