Wednesday, 3 December 2008

A Ringing Endorsement

An article has been published recently on the Internet which I found very interesting. It was a monetary statement published by Dr Gono the Governor of the Bank of Zimbabwe earlier this year in April. I have included snippets from the article below.

"As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests."

"That is precisely the path that we began over 4 years ago in pursuit of our own national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification and demonization we have endured from across the political divide."

"Here in Zimbabwe we had our near-bank failures a few years ago and we responded by providing the affected Banks with the Troubled Bank Fund (TBF) for which we were heavily criticized even by some multi-lateral institutions who today are silent when the Central Banks of UK and USA are going the same way and doing the same thing under very similar circumstances thereby continuing the unfortunate hypocrisy that what’s good for goose is not good for the gander."

"Our economy is and has been in trouble for over ten years and our extraordinary interventions by whatever name have helped to keep the wheels of this economy moving."

"Of course, in the short-term such interventions are without doubt inflationary but in the medium to long-term they trigger and propel economic growth and development that everyone craves for."

For those of you not in tune with the modern economic collapse of Zimbabwe, inflation is a big problem over there. Well it's more than a problem so much as the currency is worthless with the rate inflation running in the millions. As the currency has no stability the economy can't function, as prices can't find a stabilisation point, subsequently businesses can't invest as trying to predict future costs is impossible. Add to that disastrous policies such as price controls and you have a recipe for product shortages as retailers actually loose money by trying to sell the products below market value.

This rate of inflation did not happen over night. It happened after years of mismanaged fiscal and monetary policy. Robert Mugabe and his Kleptocratic regime ran up government debts that could not be paid, thus resulting in the use of a printing press to pay the bills.

As we can see in the chart below inflation was in its infancy less than 10 years ago. When the government began printing money to try pay their bills and implemented a lot of disastrous policies inflation began to take off. The problem with inflation, is once it has emerged its very hard to contain, as prices rise, people demand more pay which puts further strains on the governments costs, so they have to print more money, as the vicious cycle continues. Capital Investment collapses as the currency has no stability, in turn a flight of foreign capital ensues.

In the above graph, Inflation also drops briefly as the government implement a host of policies that stifle markets forces such as pricing by having "Price Controls". Of course the deflation effect is short lived as market forces should never be distorted by governments and bureaucratic institutions. From 2005 inflation exploded and now stands in the millions. In the short time of writing this article inflation has probably increased in a magnitude of 10's.

The reason the UK had such a bad recession in the early eighties was not due to Thatcherism, as many populist anti establishment figures proclaimed at the time such as Ben Elton in the Young Ones. It was due to the inflationist policies that were perpetrated by the Labour government in the seventies, as they spent money they didn't have and funded the difference with inflation. Thatcher came to power and inflation was rampant, as she begun to implement her monetarist policies to tame inflation, in effect contracting the money supply. As painful as this was and as high as unemployment became, it was completely necessary as the economy could not progress until currency stabilisation had been achieved. I'm not a Thatcher fan, it was her policies after this that created the divisive nation we now live in and decimated communities, but returning Britain to a more stable footing allowed the eighties boom, and the subsequent boom we have just been through.

Again, just like the seventies, the UK has begun tampering with market forces and running up deficits they can not pay, trying to inflate their way out of the current credit collapse. Like any previous government that has tried this, it will fail in disaster. Don't be fooled by talk of deflation. When you look at the underlying economic picture it is inflation we will get. It might not be next year or in two years, but it will happen at some point in the future and with it the devastating effects that it causes. As one of the quotes mentions above "keep the wheels of the economy moving" has an eerie ring to it, like a statement from Gordon Brown at the present time. We have been told at all costs we must keep the economy moving. Even if it leads to even worse economic hardship for the medium to long term.

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