Friday, September 18, 2009

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.

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