Secret of Inflation (Hong Kong)

Money

Money was described as medium of exchange goods and services, which always makes us neglect that money is a product created by human. Keynesian economist said inflation is about the demand and supply curved in aggregate of the economy, which like people spend more when the economy is booming, which all make more money chasing the same amount of goods and services. In the view of Monetarist, inflation is a concept of M(Money)V(Velocity) = P(Price Level)Q(Quantity of Economic Activities). If the price goes up, it could either be caused by more amount of money in the system or higher velocity.

To whom didn’t study economy as major in college, it could be hard to understand to concept. To make it easier for everyone, I would say money is a product. Put it in demand and supply curve, on the supply side when more amount of money is existing in the market, money would be less valuable, and because the money is now less valuable than it used to be, sellers would only take more amount of money for services or products, and that is inflation.

Inflation could be also created by the incensement of velocity. If people spend their money right away they received it, there would be more amount of money exist in the market. In a developed city like Hong Kong, velocity of money is not likely to increase a lots because the payment tool is enhanced to its top speed and the stable economy also steadies the velocity as well.

Let’s put the (money as a product) theory into Hong Kong. Hong Kong dollar it linked with US dollar, which makes Hong Kong have no right to control it money supply through printing more money. Authorized banks could print HK$7.8 only if they deposit US$1to the Money Authority, so every dollar authorized bank printed is backed by the ratio of HK$7.8 to US$1. In the last decades, lots of countries are printing their bank note to resist economic downturn, Hong Kong has successfully attracted lots of money from different countries due to it unique policy and legal system. As a result, the supply of Hong Kong dollar is increased and push the price goes up, and create inflation.

The inflation in Hong Kong is mostly reflect on asset, price of property and stocks soars high. What would people in developed country do if some of them could easily get a huge amount of money? Some of them may spend it on luxury good or travel. But there is a limit about spending the money, what would they do with the rest of their fortune? I would say they would put it on asset like house or stock, as historical data of Hong Kong show us that it would be a rather safe and prominent choice. We can see the price of house is almost raised 400% to 500 in the last decade. And stocks is about 300% to 400%. That's why people who live in Hong Kong have no hope.