Tuesday, July 03, 2007

At so it grinds on...

Look, no one much likes Mr Mugabe but you have to hand it to the guy—who would have thought that one man could utterly destroy one of the most thriving economies on the African continent in such a short space of time?
Plain-clothes police sought to enforce Zimbabwe's new price controls by raiding shops yesterday as President Robert Mugabe's regime waged a desperate struggle against soaring inflation.

Ministers claim that the inflation rate of 4,500 per cent—the highest in the world—is solely caused by greedy shopkeepers raising their prices for no good reason.

And what happens when you raise prices this much?
One woman said she supported price controls because her salary "has been stagnant for the past year and I can't afford the escalating prices".

"Even if Mugabe is doing this to win votes I don't care, I just want to feed my family," she said, as she pushed a trolley full of bread, soap, milk and soft drinks. She knows that these products will shortly disappear from the shelves.

Brilliant! All of the shopkeepers are raising their prices "for no good reason" to levels that ensure that the vast majority of their customers can no longer afford to buy anything: does that strike you as good business sense?
Propaganda tries to portray businessmen as the true authors of the economic collapse—deflecting blame from Mr Mugabe.

But economists say that the prime cause of inflation is the government's huge budget deficit, which it deals with by printing more money. This immense borrowing requirement is, in turn, the result of the wider economic failure caused mainly by the seizure of white-owned farms.

Instead of dealing with the deficit, the regime has imposed draconian price controls. Last week, the authorities ordered shops to cut basic food prices by 50 per cent after retail prices had risen by 300 per cent in only seven days.

This whole principle is an absolute fundamental, of course. Roughly speaking, when countries adhered to the Gold Standard, the currency unit represented a fixed proportion of the gold in the national bank. Thus, if you printed more currency units (without increasing the amount of gold) then, naturally, each unit had to represent a smaller proportion of the gold reserves: hence each currency unit became worth less. The currency unit has less actual value and thus does not have as much purchasing power: this is essentially what inflation is. This system, of course, put massive constraints on borrowing (hence our leaving in order to be able to fight a World War).

These days, as I understand it, the Gold Standard has been replaced by a perceived worth of the country's economy (a bit like the perceived worth of a publically-listed company) which can be affected by a vast number of different factors. However, as a rough rule of thumb, the idea is the same: the currency unit is worth a proportion of that perceived economic worth.

In the case of Zimbabwe, the government's insane policies, poor harvests, massive borrowing, poor property rights and shattered infrastructure has undermined confidence and ensured that the economy's perceived worth was already low; so, naturally, the worth of each unit of currency (the Zimbabwean dollar (Z$)) has also dropped in value compared to other currencies.

However, the Z$ has lost even more of its worth because the government keeps printing money thus ensuring that each currency unit is worth even less as a proportion of an (anyway fast-falling) perceived total economic worth. And hence you get hyper-inflation. This is pretty much what happened in the Weimar Republic and those who do not learn from history are doomed to repeat its mistakes, etc.*
The new controls force supermarkets to sell food at below its cost from wholesalers. Unless the regime relents, there will be food shortages, empty shelves and, eventually, the closure of all shops.

"We won't be restocking. If need be, we might have to close shop rather than stick to government prices," said the manager of one store.

So, how soon before people start starving in earnest? And how soon before the West is bullied and cajoled into bailing out Zimbabwe? Again? Timmy gives it three weeks: any advance on that?

We are just prolonging the misery: Mugabe must be removed and a half-decent government (or at least a less pig-ignorant and endemically-corrupt one) put in place. I mean, fuck me, the can have the Gobblin' King if they like: much as I loathe the Cyclopean fuck, he can hardly do worse than Mugabe.


* I am quite prepared—and, indeed, willing—for any real economists out there to pull apart my—very rough and ready—inflation explanation. I am, after all, only an interested amateur, dredging up some of his old WWI history.

2 comments:

Roger Thornhill said...

Also bear in mind that Zim cannot feed itself, so has to spend FOREX to buy in food or try to buy it for Z$. The sellers will impose forward exchange rates - not the rate now, but what they will get when they eventually convert, so the hyperinflation is second and triple-guessed and the spiral moves towards the exponential.

I suspect Roberto has cornered the reserves of FOREX and would not see it wasted on something as trivial as food for the people...

Another lesson in how money can fail as a reliable medium of exchange and stored wealth can be seen in Nationalist China's "Gold Yuan" in the 1930's. A tragic time.

haddock said...

The Remittance man has written a good piece on 'Bob' as he calls the evil bastard and the problems of getting rid of him
http://tinyurl.com/3alfdc