One easy reform, major results. Many more to go.

Recently I was sent a documentary regarding the current situation in Zimbabwe. I have long been interested in that poor nation. It is a country that was doing relatively well until the "president for life" Robert Mugabe decided to plunder the economy for his own benefit. He plunged Zimbabwe into chaos, famine and genocide.

Mugabe has not been the truly elected leader of Zimbabwe for several elections now but he has rigged the vote counting, with the complicity of the South Africa's ruling African National Congress. I won't go into the 30 year history of Mugabe's misrule of Zimbabwe here but mention one policy he adopted a few years ago.

Not long ago Mugabe decided he could pay for everything he wanted by printing more Zim dollars. So he had the printing presses running at full speed churning out more money—much as George Bush and Barack Obama have done. The result was that inflation started to escalate.

Mugabe never takes responsibility for his screw ups (again like Dubya and Obama) so he said that inflation was due to prices rising. Of course, he has it perfectly backwards. Inflation causes prices to go up. And what is inflated is the money supply. As the money supply is expanded the value of each dollar declines. As the value declines it takes more dollars to buy the same thing.

Mugabe responded with wage and price controls. He passed a law saying the price of goods and services couldn't increase. At the same time he was trying to print more Zim dollars driving down the currency's value. So, with a lethal combination of inflationary police with price controls, Mugabe created a shortage of virtually everything. Products disappeared from the shelves. Producers were basically told they had to accept worthless currency in exchange for valuable commodities. In spite of Mugabe's pointless legislation the real price of goods escalated. But wages were frozen and Mugabe was starving his own people to death.

After losing yet another election Mugabe knew he was facing a coup so he allowed the actual winners to be partners in his government. And the Movement for Democratic Change took a rightful spot in government, though they actually should be ruling without Mugabe, who deserves a firing squad. The MDC decided that something had to be done about the shortages. So they legalized the use of US dollars and South African rands in Zimbabwe. That effectively removed the price controls which were in Zim dollars.

Overnight two things happened. Zim dollars disappeared from the market place -- no one will take them. And the markets were flooded with new goods and products. The shortages disappeared instantly. Last year inflation in Zimbabwe reached 231,000,000 percent. In other words, something that cost $1 at the beginning of the year was selling for $231 million at the end of the year. Inflation now appears to be done to about 1 per cent per month or less.

The last time I was in Zimbabwe everyone wanted South Africa Rands or US dollars and that was prior to Mugabe's printing press taxation policy. Inflation is a tax, it is an indirect tax. Instead of taxing your income the government reduces the value of your holdings through the printing of new money. They spend the new money first, before it pushes prices upwards. So they get the benefits of the spending and you pay later with higher prices. Politicians find it easier to steal your wealth through inflation than through taxation—it's less likely that they get the blame. And they will do their best to blame "greedy capitalists" for their own sins. And large numbers of the public are dumb enough to believe them.

Nyoko Nyazvigo is a widow who crosses into Mozambique to clean houses for a living. She is paid in foreign currency and uses that to buy goods. She says she is happy the Zim dollar has disappeared. "With the Zimbabwean dollar, prices changed almost every day — and sometimes every hour. With the US dollar and rands, even with the few (Mozambican) meticals I get, I know I can save for a week and buy something." Inflationary policies punish people who save money.

The East African says that what happened in Zimbabwe is what you expect when you let politicians determine the value of money. I agree. The author noted, "that the US is in debt to the tune of $30,000,000,000,000. May be it might make sense [for the Zimbabweans] to follow the Maasai and stay with cattle [as a currency]." He does have a point.

The US government is actually following Mugabe's lead and inflating the money supply to astronomical levels. Inflation is sure to follow meaning. Jack Puglsey, in his recent newsletter, warns: "There's no telling when—or how severely—price inflation will surge. All we can be certain is that the silent tax [of inflation] will be levied with a vengeance." So anyone holding their assets in US dollars, given the way the Bush/Obama administration is inflating the money supply, is at risk.

But clearly a return to a currency controlled by Mugabe is lunacy. Of course, that is precisely what Mugabe wants. He, and various left-wing journalists, argue that US dollars are difficult for rural Zimbabweans to acquire. But as Garika Chimuka, in the Zimbabwe Telegraph, points out:

Before the demise of the Zim dollar in 2008, rural populace suffered the worst in living memory since they were made to part with their cattle for useless Zim dollars which bought nothing.

That is why in 2008, most rural Zimbabweans were now bartering their livestock for grain, clothes or even school fees With the introduction of currencies like the US and rand which are stable currencies, the rural people can now easily sell their produce or livestock and get money which they can use or save without being short changed.

It also removed the need for barter trading which was heavily skewed against rural populace most who lost cattle for a single bag of maize Therefore to suggest that re-introduction of the Zim dollar will help rural Zimbabweans is the height of idiocy.

The Mugabe- Gono led government will not move from 1 village to another giving the rural populace money for free. They will have to earn it. The rural Zimbabweans are better off selling their goods and services for a currency that works.

In most rural areas, the old men and women value saving their money. Think of how our grandmothers would keep mini-banks of notes and coins sometimes for a number of years only withdrawing it for a rainy day. This is only possible if they have a stable currency not the Zim dollar which Gono and Mugabe are crying for.

It should be noted that the Mugabe regime is speaking of a gold back currency now. But before you get too excited ask yourself a question. How will a bankrupt government purchase the gold necessary to back the new currency? The Zimbabwean government doesn't have the assets worth the gold they need. Chimuka warns that the Mugabe regime "will have to grab the gold" to back the currency and that "will automatically kill all the hopes in mining."

This is not to say that a gold backed currency can't be introduced. I suggest letting the mining companies store the gold and pay employees in script backed by gold. Let the mining companies print the script privately and allow Zimbabweans to use that script just as they use the US dollar and South African rand. Thousands of mine workers could be paid in gold-backed script which they will use to purchase food and other goods. Long term this gold-backed script would be even more sought after than the sinking US dollar, or the rand.

But, given past experience with Mugabe, what he will do would be confiscate gold to produce his currency, and then crank up the presses again issuing script in excess of the gold he has in stock. In other words he would start the inflationary process all over again. Gold backed currencies have been inflated by governments before. Mugabe, I suggest, is just looking for a new way to sucker people into accepting a currency he inflates at will yet again.

It is one thing to allow competing currencies to tame Mugabe's inflation monster. But Zimbabwe needs to restore production and agriculture. That will be much harder. It will require evicting Mugabe and his vampire elite from the hundreds of productive farms they confiscated, in the name of the people, for themselves. It will require putting an end to the systematic legal plunder of Zim's businesses by the government. In other words, it requires the destruction of the ruling elite's ability to interfere in the economy. That will be a much harder task to accomplish.

Ducknomics: Uncle Scrooge on the evils of inflationary policy.

If you have about 22 minutes here is an episode of Duck Tales that teaches the lesson of the evils of inflating the money supply. It's so easy to understand that they can teach it to children --- too bad Congress and the President aren't that intelligent.

Welcome to the United States of Zimbabwe

Here is a report from the New York Times:

The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities. Having already reduced the key interest rate it controls nearly to zero, the central bank has increasingly turned to alternatives like buying securities as a way of getting more dollars into the economy, a tactic that amounts to creating vast new sums of money out of thin air. But the moves on Wednesday were its biggest yet, almost doubling all of the Fed’s measures in the last year.

...there were also clear indications that the Fed was taking risks that could dilute the value of the dollar and set the stage for future inflation.

We should note that the Times had this to say about Zimbabwe creating vast new sums of money out of thin air:

But [Zimbabwe's] government has generally chosen to print more money instead of readjusting the value of its currency; Zimbabwe's money supply rose 226 percent in 2004. The result has been hyperinflation and a thriving black market in money and goods. Hyperinflation and the artificial exchange rate, in turn, have crippled gold mining, Zimbabwe's other big export industry. Production fell 18 percent in the first quarter of 2005.

The newspaper quoted one Bulawayo businessman as saying: ''It's running out of contro. When you're going down a path of destruction, you can keep putting patches on the tires -- patch, patch, patch -- but eventually the tire is going to burst.''

My suggestion is that we ask this Bulawayo businessman if he could take on the role of Obama's economic adviser. Apparently Mr. Obama has his heart set on being the Mugabe of America.

For more on the destructive path that Obama has set for this country see this post.

Update: Bloomberg reports, "The dollar headed for a record weekly drop against the euro after the Federal Reserve ramped up supply of the currency..." The dollar is now at a two month low against the euro. Sean Callow, senior currency strategist for Westpac Banking in Australia says, "They're [the Fed] are effective printing money; we regard this as profoundly bearish for the dollar." Yilin Nie, currency strategist for Morgan Stanley wrote, "As the money-printing machine kicks into high gear, dollar devaluation should accelerate with a ballooning money supply."

Back in January I warned: "I hope I am wrong but I worry that the economic state of the country is much worse off than believed." I also said, "I would also suggest spreading your investments around—meaning look for savings accounts that are not denominated in U.S. dollars." In the same article I said, "Invest in hard assets like gold and silver but also invest in foreign currencies." Here are two charts for the last few months for the currencies where I have invested. This is their value compared to the U.S. dollar. Luckily they don't Barack Mugabe managing their money supply. I am also looking for a good place to buy silver. Any suggestions?

Combine socialism and inflation and this is what you get.

There are experiences in life that you never forget. I can remember one warm afternoon just before sunset as I was floating down the Zambezi. The sun was setting just behind the left bank of the river. The brilliant reds and yellows glowed behind the palms that reached toward the sky. At a small clearing on the bank stood a couple of elephants and a giraffe coming to the waters for a drink before dark. Hippos floated leisurely in the waters and here and there the menacing shadow of a crocodile could be seen gliding below the surface.

I was just up-river from Victoria Falls, but its thundering waters were muted that summer by a drought. Still the people of Zimbabwe could survive those periodic droughts. The country was relatively prosperous.

The next day we walked out onto the bridge between Zimbabwe and Zambia. At this point we had left Zimbabwe officially but not quite entered Zambia. A rail track divided the bridge with foot traffic on each side of it. A young boy was selling frozen ice treats on the bridge. I bought two, one for my companion and myself. The boy refused Zimbabwean dollars preferring South Africa rands instead.

Not long after this memorable trip the “president” of Zimbabwe, Robert Mugabe, began fulfilling his promise of installing a one-party, socialist state. As part of that campaign he confiscated the farms of “wealthy, white” farmers. In truth, he confiscated property from black farmers as well but the media didn’t find that newsworthy. The result was the destruction of food production in the country. As Mugabe saw it that just gave him one more tool to control the people: those who voted for Mugabe were fed, those who didn’t starve.

Mugabe also had his own form of a “stimulus plan”. He showered special benefits on those groups allied with his ZANU-PF party. Mugabe spent lots and lots of money. According to the “consensus” economics of the American media that ought to mean that Zimbabwe today is swimming in wealth. The government engaged in massive deficit spending and the result was a worsening of conditions, not an improvement.

Apparently Mugabe doesn’t have the divine touch that Mr. Obama must have. The Obama bailouts are different due to that Midas Obama touch.

When government spends beyond it’s means then it has two options. One is to increase taxes. Obama pledges not to do that but then he is a politician. The other is to monetize the debt—print more money. Our government has been increasing the money supply at unheard of rates. More and more money, without increased production, will simply drive up prices at accelerated rates.

The business cycle of boom and bust is what we expect from government intervention. The politicians manipulate markets to favor certain forms of production over others. Investments are made in light of these interventions. For instance a tax on one product can push investment away while subsidies for another, such as lower rates for mortgages, can push investment in that direction. As more and more capital is invested badly a crisis begins to build. What is being produced is not what ought to be produced. Eventually there is a collapse of the artificial markets, which means jobs are destroyed, capital is wiped out, and companies go under.

The solution is to allow labor and capital to be reallocated. That means allowing the bad investments to go under so that producers in fields where there was underproduction can assume the labor and capital for their needs. But it is here where the interventionists, who created the problem originally, decide that more intervention is needed to prevent the reallocation of labor and capital. So they bailout the bad industries and keep the crisis going. The crisis continues because the solution is the reallocation from the bad investments. Keeping labor and capital tied up in the wrong areas of the economy just prolongs the problem—it delays the solution, which is the redistribution of resources to the proper sectors of the economy.

Ludwig von Mises warned of the political solution to depressions:

It has often been suggested to “stimulate” economic activity and to “prime the pump” by recourse to a new extension of credit which would allow the depression to be ended and bring about a recovery or at least a return to normal conditions; the advocates of this method forget, however, that even though it might overcome the difficulties of the moment, it will certainly produce a worse situation in a not too distant future.

Mr. Obama has introduced a budget that is the Frankenstein of all budgets. If you were to combine the deficits of every presidential budget since the beginning of the country you would still not reach the spending deficit that Obama intends to inflict on this country. At the very least we should expect an Obama deficit of $1.2—$1.5 trillion. Diane Francis, at the Financial Post, writes:

Now the new Obama regime, and others, is simply going to turn up the presses and print more money again. They are going to inflate their way out of this mess.

Already there’s talk of a US$2 to 3 trillion stimulus and rescue program and this is likely to double. This will turn around the problem and set the world up for a bigger, deeper recession in a handful of years. But it worked in the past:

The serious recessions of 1974-75 and 1981-82 were as bad as this one but were turned around by dramatically Increasing the money supply: Both ended with economic growth within 36 months; a booming stock market a year later and lower unemployment within 24 months on average. Money supply increased by 12.6% in 18 months in 1974-75 and by 14% in 1981-82.

The US$2-3 trillion already in the works with the Obama administration will represent a 25% to 35% increase in the money supply in each of the years 2009 and 2010. That’s more than 50% money supply growth which will, if it occurs, bring about a paper boom again. If this money is actually spent, the turnaround could be by the end of 2009. This will set up conditions for inflation then another crash in a few years.

Mugabe attempted to print his way out of his deficit spending; Obama appears ready to try the same tactic. Our productive sector hasn’t yet collapsed so I don’t expect we’d be out panning for gold just to eat. But this massive rise in the money supply ought to be worrying. Government wants you to spend your way out of poverty. Surely this is the time to do the opposite. So save what you can. But savings will be hazardous if the dollar’s value falls due to the intentional inflation of the money supply. While the dollar’s value has increased in recent years I’m resisting the temptation to bring my savings back into US dollars. And while I’m not generally a “gold bug” I do think that investment in gold and silver may not be a bad thing.

It's Going to be a Bumpy Night.

Here are some comments from Byron Schlomach, an economist at the Goldwater Institute which relate to some points I made a few days ago -- points which upset at least one blogger at the Village Voice who attacked me for being some Right-wing nut (apparently ignoring my views on marriage equality, ending corporate welfare, opposition to the Religious Right, opposition to censorship, desire to end the war on drugs, my anti-war position, my support for immigrants and numerous other views). In my article I warned that Obama's illusionary jobs program is going to cost billions, on top of the billions that Bush, clearly the worst president in my lifetime, has pushed through.

Those billions will be provided either through taxes or cranking up the money supply. If through taxes they will destroy jobs. If through money supply expansion it will create inflation. Mr. Schlomach looks at the dishonest and deceptive way that the Bush administration has paid for their hand-outs to billionaires "hurting" from the government-created housing bubble. Bush used the most dishonest means of paying for corporate welfare -- inflating the money supply. Mr Schlomach provides the following chart showing what has happened with the money supply in the last days of the Bush debacle.
Apparently George Bush and his clownish cabinet learned monetary policy from the likes of Robert Mugabe. Mugabe also revved up the printing presses in Zimbabwe to buy himself out of politically-created problems. The only restraint Mugabe had in printing new money was that his government couldn't afford the paper and ink -- literally. Here is a video from Al Jazeera on how well that has worked out.


This video illustrates precisely what happens when the money supply is increased. Schlomach says:

Most of this cash went straight into bank vaults as part of the effort to shore up the nation's financial sector. It takes awhile for banks to turn the cash around and loan it, but when they do, watch out. Just like everything else, when the supply of money increases, it becomes less valuable, meaning it takes more money to buy things. That's inflation. Remember the 1970s when inflation was at double-digit rates? Well, that will pale compared to what we could experience over the next few years.

The public erroneously confuses the results of inflation, higher prices, with inflation itself. What is being inflated is the money supply. As the supply of money increases the value of each new bill is less than the previously printed bill. As the value of the money declines it takes more money to purchase the same amount. Thus prices increase. But those increased prices are the result of inflation not the cause of inflation. A persistent, general increase in prices, is not possible without a preceding persistent, general increase in the supply of money.

This accurate definition of inflation is not popular with politicians. The reason is that it clearly places the blame where it belongs -- on those who have the ability to increase money supply -- which is the government. To blame inflation on its results, higher prices, allows them to pretend that the cause of the crisis is the private sector. Mugabe has been doing this for years now.

With each passing day we are witnessing a repeat of the Great Depression. First, you have a big government advocate like Hoover trying New Dealish type policies to get out of the Depression. Contrary to the myth, Hoover did not practice laissez faire at all. He was a staunch advocate of aggressive government intervention in the markets in practice. That didn't work and the downturn lingered on and on. Roosevelt came into office and it lingered for years longer due to his policies. Obama is clearly planning on playing Roosevelt to Bush's Hoover. The difference is that both Hoover and Roosevelt were restrained in comparison to these two.

The Village Voice author attacked this site indicating that I have to be nuts about the results of Rooseveltian policies because, if I were right, Roosevelt wouldn't have been re-elected. I guess he would then argue that Mr. Bush was a great president with all the right policies because he got re-elected as well. Based on the twin disasters of Bush and Obama I can only quote the character of Margo Channing (Bette Davis) in All About Eve: "Fasten you seatbelts, it's going to be a bumpy night."