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A solution for Zimbabwe that will help it overtake South Africa

Nov 24 2017 06:00
Edward Ingram

IN MY last essay I advised South Africa to play its Get out of jail card, meaning avoid a recession and help the economy grow while improving its credit ratings, and seeing interest rates and inflation both come down – with a bit of luck.

I received mixed reactions, one from someone who clearly did not understand what was being said and thought himself to be an economist.

I just asked him to explain what it was that I do not understand rather than passing insults. Arguments are fine, but no one learns from an insult. I always listen to arguments, which probably explains why I know more than he does.

Four decades of doing that is quite a long time.

At the other extreme I got this from Laki Papaioannou, who said it looks to be saying much the same thing:

It starts off explaining things which almost everyone knows, but in a nice, easy way and at an easy pace.

It ends well by explaining how the world’s economies got into such a mess in 1929 and 2008, and how Japan did in the 1990s.

Interestingly, the solution this video puts forward was that in each such case central banks responded by printing money, rather than trying to get people to borrow more. And that is exactly what I proposed last time for South Africa.

The difference is that I have thought all of this through in a bit more detail than most governments have.

We all agree that printing too much money leads to hyper-inflation, but replacing the usual debt-based stimulus with a printed money stimulus which allows people to spend more despite their debts, is magic. As I wrote in the essay, the key to doing this is to give a non-government committee the power to veto an over-print.

Central banks already have a similar mandate to manage inflation, but the mandate needs to be more clear-sighted about how to balance the stimulus provided. They know very well that reducing VAT has a fast and great effect, but they seem to forget that the additional money created is needed by the then larger economy. So, they start raising VAT too soon and everything goes into reverse. The UK did that.

Other economists who may be helpful for people to read include Richard Werner and Ben Dyson, but I am also able to help them with some significant issues.

For example, bank failures:

When a bank fails, the depositors can be saved by creating some new money to save the bank while letting go of the shareholders and the board of directors. Depositors are not to blame. They do not know what the bank had been up to. There is no moral hazard in rescuing them. The UK government rescued two banks in 2008 and made a very nice profit doing it.

The economy always needs some more money anyway. No harm done, no runs on the bank, no taxpayer bailout.

Then there is the favourite wrong kind of stimulus – build new roads or some other major project.

That is a very slow way to get new money and new spending to help small businesses to avoid a recession – if it even can do that. Far better to just reduce VAT and increase spending that way. If too little borrowing is going on, lower interest rates.

But that is another story. Interest rates should not be managed. The stock of spending money circulating needs to be managed. Increasing that will lower interest rates.

Zimbabwe

Creating your own national currency is very cheap and it is easily done, but you need to have the money creation mandates in place as explained above. If you buy the currency of others, you never have enough money in circulation.

Or if you do, it is a free gift to other nations as you deliver goods and services to them in order to buy their cost-free money. Ask Zimbabwe. They desperately need their own currency and the mandate.

Another reader explained to me that the American banks should have been on board creating free new money for Zimbabwe. But then what happens to the nation’s own banks? Not acceptable.

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edward ingram  |  macro-economics  |  opinion
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