Causing inflation is a no-brainer. Getting away with it is even easier. The only small hiccup is having to callously disregard the somewhat dire consequences for your fellow-citizens. Clear that hurdle and you qualify for the job. But qualifying does not mean you will get it not many qualifiers have cronies who will give them the nod. There are even fewer who have the presence to bull**** the whole nation and get away with it.
Gideon Gono in Zimbabwe has given us a wonderful demonstration of how to go about inflating a currency and causing minute-by-minute price rises. He has been printing money at such a rate that the presses have been running white-hot. He has printed so much that by 23 June 2008, the value of the Zimbabwe dollar had fallen to 21,888,000,000 or 21,888,000,000,000 pre-2007 Zimbabwe dollars per 1 US dollar. The largest denominated note was then 50 billion Zimbabwe dollars and some estimates put the rate of price increases at something like 400,000 per cent per annum. However, Gono still has some way to go to beat the 1994 Brazilian, the 1923 German, and, daddy of them all, the 1946 Hungarian inflation which had prices doubling every 15 hours. If he keeps up the good work, hell beat the record without much difficulty.
On its website, the Reserve Bank of Zimbabwe swears to uphold the values of honesty, integrity and uprightness. It also claims that its primary goal is the maintenance of the internal and external value of the Zimbabwean currency. According to the bank, the interest rate is 6,500 per cent, CPI 974,925,192.9 (now dont forget the .9) and the year-on-year inflation rate is 100,580.2 per cent. Gono doesnt even claim the 400,000 per cent. You see, you can be a master inflationist and still be a little modest about your achievements. What a smooth operator!
What the Zim experience is showing us is that even with such a spectacular demonstration of inflation-creation most commentators continue to believe that printing too much money does not cause rapid and general price increases. This means as a countrys inflationist, you are home free. Commentators, who fortunately include a whole raft of economists, will blame things like the increase in the oil price, executive salary increases, the greediness of shop owners, the current account deficit, the phases of the moon, or some other such concrete phenomenon, leaving you free to do your own thing while everyone continues to smile on you.
Semantic confusion enables inflationists to do the job and avoid being nailed. A century ago, the word inflation meant an untoward increase in the quantity of money in circulation and even non-economists knew that this caused general price increases. They knew that debasement of the currency meant a reduction in its purchasing power and they would get fewer goodies for their bucks. Alternatively, they had to hand over more bucks for the same quantity of goodies. According to pedantic economists the word inflation meant an excessive increase in the money supply (the cause), which always resulted in general price increases (the consequence). Then some genius (it must have been a budding inflationist) thought of the clever idea of calling general price increases inflation. Give the consequence the name of the cause and even economists no longer know their As from their Es absolutely brilliant!
Our own Tito Mboweni was just getting up steam last year in June when the year-on-year increase in M0 (the monetary base, which includes notes, coins, and bankers deposits with the Reserve Bank) hit a peak of 22.65 per cent; his conscience then got the better of him and he took his foot off the pedal. He is obviously not callous enough to be a true inflationist. You have to have a hard heart to erode the purchasing power of the savings of old-timers, widows and orphans, and others on fixed incomes. When you start issuing new money like its going out of fashion, you reduce the purchasing power of all the money already in circulation. Its a steal, of course, if nobody blames you, but you cant afford to let twinges of conscience affect your inflationist performance.
Give it time. In South Africa, there are people after Titos job who think hes been a fuddydud for sticking to the Reserve Banks primary objective to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic as required by the Constitution. For people burdened with the injunction to act with honesty, integrity and uprightness that could be a problem, but as Zimbabwe has shown, there are ways around mere words in constitutions. No thoroughbred inflationist will be deterred by semantics.
Citizens will love the lower interest rates that result when you first increase the money supply. Theyll borrow money to buy property and all sorts of goodies that theyve always wanted but couldnt afford. Banksll throw money at them and many will borrow as much as they can and spend it. When everyone starts blaming everyone else for price increases, your pals in government will talk about and even introduce price controls, labour unions will clamour for inflation-plus wage increases, and eventually some curmudgeons may even start dragging your name into the blaming business.
When the red alert flashes its time to act. Dont breathe a word about money supply! Come down hard; give the usual long list of reasons for the price rises and declare that excessive spending has to be curbed. Consumer behaviour must change; inflation expectations must be expunged from their minds; those that borrowed all that nice lolly from the banks and spent it must suffer the consequences; they must be choked by having to pay so much interest that they have nothing to spend on other things. Ratchet up the interest rates, then everyone will complain but tell you how responsibly you are acting. What a life! Youll probably get a medal for your noble efforts.
Author: Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the authors and may not be shared by the members of the Foundation.
FMF Feature Article/ 24 June 2008
Publish date: 30 May 2009
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The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.