A Tale of Two Dollars

[Gus Van Horn blog]

By Gus Van Horn from Gus Van Horn,cross-posted by MetaBlog

Some time ago, I linked to an article that described the already-dire straits of the Zimbabwean economy when its inflation rate was only 782 per cent. Today, I encountered a lengthier article that not only informs us that the rate is now 1,200 per cent, but that the inflationary policies of the Mugabe regime have acted synergistically with its previous expropriation of land from white-minority farmers to cause the former breadbasket of Africa to see its once-productive farmlands lie fallow. This reads like it was lifted straight out of

Atlas Shrugged

.

With unemployment at more than 70 percent and the average monthly salary at about 140 U.S. dollars -- not enough to pay rent or school fees -- a vast parallel market has sprung up. Pulling up at a supermarket in the eastern city of Mutare, my former hometown, I was approached by a dozen youths offering to sell me sugar, cooking oil and maize meal -- essential foods that supermarkets must sell at low, state-controlled prices. Informal traders hoard these goods and, when the inevitable shortages come, sell them at inflated prices. Informal trading is illegal, but it is the only way many Zimbabweans earn a living.

How did Zimbabwe get to this point? It began in the late 1990s when, in order to pay for a costly military incursion into civil war-torn Congo, President Robert Mugabe ordered the printing of vast amounts of money, and inflation climbed steeply.

But it has reached today's levels only since the commercial farm invasions, in which 4,000 out of 4,500 white commercial farmers were kicked off their land, beginning in 2000. White farmers accounted for an estimated 60 percent of the country's foreign currency earnings through the export of tobacco and other crops. The invasions not only crippled domestic production, they scared away foreign investment. To dig itself out of debt and pay its bills, the government has simply printed more money.

Meanwhile, production by "new farmers" -- landless peasants who moved in to occupy the white farms -- is pitifully low. Part of the reason is that although the government offers fuel and maize-seed subsidies to new farmers, many have discovered that it's more profitable to sell the maize seed and fuel on the black market for inflated prices than to use them on the farm. Millions of acres of once-productive commercial farmland lie fallow. The government blames drought, even though the rains have been good.

This is just a taste.

I found the entire article morbidly fascinating reading, not to mention worth remembering. Why? Because at least one analyst fears that the United States faces the threat of similar inflation down the road unless it drastically changes its ways.

A newly published paper by a researcher for the Federal Reserve Bank of St. Louis warns that a ballooning budget deficit and pension and welfare timebomb is growing into a $65.9 trillion fiscal gap that will force the United States into bankruptcy.

...

How much is $65.9 trillion dollars?

"This figure is more than five times U.S. GDP and almost twice the size of national wealth," writes Kotlikoff.

"One way to wrap one's head around $65.9 trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143 percent. [link dropped]

And what if we do none of the above? (Or a preferable fourth alternative, abolishment of the welfare state altogether.)

Given "the fiscal irresponsibility of both political parties," the professor sees the most likely scenario for maintaining solvency as the government simply printing money to pay its bills.

Kotlikoff explains: "This could arise in the context of the Federal Reserve 'being forced' to buy Treasury bills and bonds to reduce interest rates. Specifically, once the financial markets begin to understand the depth and extent of the country's financial insolvency, they will start worrying about inflation and about being paid back in watered-down dollars. This concern will lead them to start dumping their holdings of U.S. Treasuries. In so doing, they'll drive up interest rates, which will lead the Fed to print money to buy up those bonds. The consequence will be more money creation -- exactly what the bond traders will have come to fear. This could lead to spiraling expectations of higher inflation, with the process eventuating in hyperinflation."

Yes. He said "hyperinflation". Whether Zimbabwe serves us as a cautionary tale or a prophetic one is entirely up to us.

So when do we start discussing the phasing-out of social security and other attempts to pretend that the state can create guarantees out of thin air?

-- CAV

http://ObjectivismOnline.com/blog/archives/001813.html

[softwareNerd]

The South Africans have hatched their own plan to give land to blacks.