zimfinalpush
High Inflation - The Silent Killer
April 16, 2007
Suddenly people are starting to wake up to the disaster happening in Zimbabwe. Southern African leaders are gathering to find ways to address the issues. ZANU-PF, the main goon party of Zimbabwe is meeting to figure out what to do with President Mugabe, Kleptocratic-in-Chief, who is currently running his country into the toilet and keeping it there. The anti-imperialists are all up in arms about how the western imperialistic powers (read the United Kingdom) are against the anti-colonial strength of Zimbabwe. The African Union is debating what to do with Zimbabwe. A brief murmur was even heard in the United Nations, which was quickly squelched. Everybody is talking about the bungled takeover of the white owned farms, the destruction of shops and homes, the endemic corruption, the rapid emigration, the breaking of the skull of Morgan Tsvangirai and the arrests of the opposition party. People are also mentioning the inflation rate (which is near 2000%) in passing. But at this moment, it's this inflation rate which is the biggest killer.
If you work in the financial markets or are connected in any shape or form to economics and business, you will know about inflation. You will know how governments panic about inflation. There is an amazing amount of human brain power aimed at managing inflation. For the great majority of people, though, inflation is known as "price rises". At this moment, I won't be exaggerating if I said that inflation makes more people excited than all the gods and religious leaders combined. Inflation, in a nutshell, is the constant reduction in the value of your money. A Dollar/Pound Sterling/Won/Rupee of today is worth more than a Pound tomorrow. A bit of inflation is good for a whole load of economic reasons, but this column tries to keep away from economics and sticks to politics and international relations.
As I mentioned, every government under the sun, irrespective of the political persuasion, worries about inflation and tries to control it. If they lose control, they are dead. The price of basic things is so core to people's existence that if they are unable to feed/clothe/shelter themselves and are priced out, they will revolt. Look at what the USSR tried to do. They kept the price of bread and basics steady for decades on end, but ultimately fell foul of the laws of economics. Even now, most of the USSR's successors are suffering badly from bad economies, because of their lack of inflation management skills. Indian governments, the biggest democracy in the world, are deathly scared of the price of onions and basic foods, as the populace harshly treats anybody who is in power during a time of price rises. The gasoline price inflation is a gigantic bug bear in the United States of America, with the price increases being one of the biggest political talking points. House price inflation is an equivalent debating point in the United Kingdom, and the long suffering phlegmatic Englishman was forced to do a very polite revolt when the fuel price escalator went beyond control. But all these are small bits. These examples are for inflation which rises maximum between 2% and at the most 50% annually.
Don't think that inflation going the other way is bad. Japan had a decade of deflationary behaviour. What it means is that a yen of today is actually worth less than a yen of tomorrow. Weird, no? What does it actually mean? Well, because of frankly silly economic policies, demand collapsed. So to encourage demand, Japanese companies kept on reducing prices. On the other hand, if this is the case, you won't buy today preferring to wait till tomorrow, when you know that the price is going to be lower. This takes the entire economy into a tail-spin. To simulate demand, Japan had interest rates at near zero for years, but again, it is now showing signs of breaking out and inflation is coming back into positive territory. Another factoid to know is that in Switzerland interest rates turned negative once. So if you wanted to invest in Switzerland, you had to PAY! Go figure!
I am not talking about normal inflation or even deflation. I am talking about hyper-inflation, an economic condition which is terrible when it occurs. Hyper-inflation is a horrible animal, it rips apart the basic structure of a state and ruins it down to its core foundations. It breaks the relationship between a citizen and the state, the citizen and the state institutions. Again, I don't want to go too deep into the causes, but basically it's because of serious and disastrous economic mismanagement Where absolute nincompoops are running the economic policy. Total criminals, people who are basically mentally deficient and have gone beyond the pale. If you print off too much paper money, then it gets devalued dramatically. How much devaluation? Well, I have used the word "gazillion" in these essays in jest, but consider two famous cases of hyper inflation in pre-war Germany, which issued a note worth 100,000,000,000,000 Marks or the Hungarian 100,000,000,000,000,000,000 Peng. By the time you count to the end of the zeros, you have run out of breath!
Give the chap his due, Robert Mugabe did reasonably well (with some exceptions like a tiny spot of ethnic cleansing and genocide in Matabeleland with the notorious Fifth Brigade) in the initial days in the 1980s and early 1990s. But ever since the white owned farms issue bit him, he has turned into a strange creature. He has unceremoniously turfed out and cleaned out hundreds and thousands of shops and houses in urban areas. All material export industries have collapsed, except the export of people, as people started emigrating in a flood (estimated three million Zimbabweans have emigrated in the past few years itself - mostly into South Africa). Because of the wholesale destruction of the commercial farming industry and the utter and complete imbecilic treatment of the agricultural sector, most of the food needs to be imported into what was previously the bread basket of Africa. But guess what? There is very little foreign exchange to pay for food imports. Who can provide food aid? The western governments and institutions could, but they are Enemy Number #1 on Robert Mugabe's list. No fuel either, no equipment and no nothing! So the industrial capital stock is slowly rusting to a halt. What is the response of his economic advisors? They try to ban inflation. King Canute is not dead folks!
Think of yourself as a Zimbabwean school teacher or a member of the previously flourishing middle class. A middle class member whose earnings are generally fixed on years on end with no bonus and a tiny salary increase. If you have that sort of incoming salary, it is tough even with small inflation. If you have a situation where prices are under hyper-inflation and doubling every week or so, then you do not need to be Stephen Hawking to realise how quickly you will run out of your disposable salary, your accumulated savings and finally your assets, like your ancestral property, house or your pension. And when you end up in a situation where your salary is just enough for two days out of an entire month, what do you do then as a middle class man? A dark joke of old Soviet times gives you the answer: "they pretend to pay us for working, we pretend to work for the pay they are pretending to pay". So you have a choice of either doing two or three jobs, do something illegal, become a criminal or simply leave the country. In this case, Zimbabweans have taken the last option. What's left? Nothing much actually. Like an anorexic patient, after finishing off the fat, the locusts in the ruling ZANU PF party and Robert Mugabe's goons have now started eating into the muscle itself, leaving the patient bony. He even asked for a loan from China. China, who is not at all squeamish about lending to all and sundry, turned him down. And for all the ills, Mugabe blames Tony Blair, USA, and everybody else outside the country.
What is even worse, is that this hyper-inflation has impacts on the neighbours. South Africa is one of the great white (if you excuse the pun) shining hopes of the African continent, a country which dealt with a very bad historical apartheid card with maturity and peace. A country with sky high moral authority and to whom people look upon as a trend setter and moral compass. A country which has a gigantic task ahead to bring its black majority up the curve. A country which cannot afford to have any kind of macro-economic problems, because any problems will blow up the very delicately balanced racial bargain. Very nice! No, actually not very nice. Let me quote Thabo Mbeki, President of South Africa, who said the following in an interview to the Financial Times of April 3rd, 2007. "President Mugabe and the leadership of Zanu-PF believe that they are running a democratic country. That's why you have an elected opposition, that's why it's possible for the opposition to run municipal governments in Harare and Bulawayo. You might question whether these elections are genuinely free and fair... But we have to get the Zimbabweans to a position that they do have elections that are genuinely free and fair."
I have to admit that I winced reading this. This is the President of South Africa speaking? But why am I surprised? This same man believed once that cucumber oil (or something like that) would cure AIDS. An election opposition whose leader had his skull cracked open, all opposition press muzzled if not burnt out! The municipal townships which have been eviscerated by the Zanu PF goons and President Mbeki is wondering about free and fair elections? Is he on the same planet as us? The way Zimbabwe is imploding, is impacting South Africa as well. Not only economically, but also the fact that it has to support three million additional Zimbabweans. The last time a migration of this magnitude happened, war broke out and a new country was born (Bangladesh). Old man Hemmingway said it all, and it typifies Zimbabwe. "The first panacea for a misguided nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists."
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