TALKING POINTS
MOMPATI MALEMA | Friday May 30, 2008 00:00
One might think that the custodians of a nation's economic well being would be comprised of wiser members. But not so it seems. Maybe the Bank of Botswana (BoB) should adopt a new logo; the Ostrich, with its head thrust resolutely into the Kgalagadi sands.
The BoB's recent (28 Feb '08) and laughable inflation predictions have stuck in their own throats. Their prognostications apparently too tough a leap in credibility for even an ostrich to swallow.
One wonders aloud whether the staff at BoB who attempt to predict inflation know that there is life outside of Botswana ? Do they ever brief themselves with world events or heaven forbid world economic news? Do they see what's coming down the pipeline? Or maybe they are not interested with their jobs. Maybe our new President may like to take his new broom into that dusty BoB boardroom and sweep out the deadwood.
For anyone interested in world economics, it has been evident for some time now (12 months minimum) that the majority of the world's economies have been inflating their currencies at hither-to unseen rates of inflation.
However, in the solitude of its sandy retreat, the Ostrich has ideas of its own:
Mmegi 28/2/08: Despite the seemingly growing amount of pressure on inflation outlook, the Bank of Botswana (BoB) remains bold and optimistic about the future, predicting the annual inflation rate to fall to just above 6 percent in the last quarter of 2008, from the January 2008 figure of 8.4 percent...Mohohlo said the annual inflation rate will be tamed to between 3 to 6 percent in the medium term.
Scroll forward just three months:
Mmegi 15/5/08: Pushed by rising fuel and food prices, the inflation rate for April soared to double digits, the Central Statistics Office reported yesterday. The national year-on-year inflation rate stood at 11.1 percent for April, up by 1.3 percentage points on the March rate of 9.8 percent. The inflation figures are now way above the 4 to 6 percent target band that Bank of Botswana (BoB) has set in its new short- to medium-term monetary policy objective.
Military men have to know their history well into order to not repeat the costly mistakes of others. BoB could therefore do well to learn from President Ian Khama in terms of studying economic history, learning from the mistakes of others and coming up with a strategic plan to make sure Botswana does not suffer the ravages of the upcoming global inflationary episode soon to hit an economy near you.
What do we mean by nations 'inflating their currencies'? We don't mean making them bigger or stronger; actually quite the opposite. By issuing more money into circulation, a Central Bank is effectively devaluing the real value of its currency. Money is no different from any other item which humans habitually lust after. The more there is of it, the cheaper it becomes. Even money has an ultimate value. Yes, even money has a universal yardstick with which to measure its worth and that measure is gold. When we witnessed the recent climb in price of gold to $1000, it was not the price of gold which was going up but rather the value of the dollar (and all other related paper currencies) that is going down. But I digress-that's another story.
A euphemism central bankers use for all this printing of new money is 'competitive currency devaluation'. Weak is not always considered bad in the currency arena - at least not in the short term. By printing and injecting new money into circulation central banks can keep their currency artificially weak. A weak currency makes a country's exports more competitive.. This is good in the short term in a buoyant economy. Earnings from exports increase. More money flows into the economy from trade and the nation prospers for a time. However, if done for any length of time, this excess currency starts to significantly increase local inflation and the costs of goods.
As we all acknowledge, healthy exports make for a healthy economy. This is what is termed 'positive inflation' which is inflation created on the back of an expanding and prosperous economy. Ask the Chinese who are past masters of exporting cheap goods, keeping their currency (Yuan) low and enjoying a healthy economy. Nevertheless, even in China inflation is starting to get out of control and their economy runs the risk of overheating.
Negative inflation or Stagflation is the bad kind of inflation. In a stagflating economy, inflation rises as the economy slows down. This is somewhat a self-feeding cycle that is difficult to curb. In the 1970's stagflation episode witnessed in the U.S. , Paul Volker, the then Chairman of the Federal Reserve, only managed to curb rampant inflation by embarking on an aggressive program of interest rate increases which in turn slowed the economy and raised the cost of living for all Americans. Some say that the US is once more experiencing similar conditions however this time around they do not have the luxury of increasing interest rates which would decimate an already crippled housing market and implode its broader economy. i.e. the cure is likely to kill the patient. The U.S. is now caught between a rock and a very hard place. Conversely and with no other option, they have embarked on a rate cutting, inflationary policy. They are trying to print their way out of their problem. All this must have passed the Ostrich by as his head was in the ground.
Why read this article written from a concerned member of the public? Because the lack of prescience shown by the unrealistic BoB figures may mean they are asleep at the wheel as the economic vehicle lurches down the hill out of control. Why is inflation so bad if it is not contained? What does high inflation mean to you and me in practical terms? Well we are already seeing them manifest right now. How many of us have noticed ever rising prices, that our Pula salaries do not buy quite as much as they did last month, that a tank of fuel costs more and more, that our groceries cost more for less. I have some treasured relics at home in my filing cabinet. One, Two and Five Pula notes - relics of bygone times. Few of us can remember the small brown One Pula note. Even fewer of us remember what it used to be able to buy which I can assure you is far more than it would today. These currency notes went the same way as the old Zimbabwe dollar before the three zeros were stripped from it; they were inflated out of existence. When inflation turns bad, economies slow, businesses earn less, make less profits, employ less people and people therefore lose their jobs. So now is not the time to behave like the Ostrich.
Now we need eyes of an eagle to see many months ahead. We desperately need a General's mindset to plan for the strategic war against inflation.
Has the Ostrich not noticed the large numbers of cars parked for sale at conspicuous traffic circles around town? Are the owners no longer able to afford the fuel to run them?
If you are a car importer or seller, a public transport operator, or a car wash owner, you will all see hard times ahead. For a limited time you may be able to pass on your rising costs to your clients. That's how inflation works - it is always you and me and the man in the street who suffers as rising costs trickle down the chain to the consumer. But eventually the public get fed up of paying exorbitant prices or they will simply become too poor to afford them. We will then see less cars being purchased, fewer cars on the road, more cars cleaned at home, more bikes, more people walking to work, and more ride sharing. That's inflation for you right there - a drop in your standard of living. Those who fall off the bottom of the economic ladder will resort to charity or crime. We will witness violent crime escalate as economic pressure vents itself at the societal level. Why do you think we are seeing the xenophobic attacks in South Africa ? It is not a 'Zimbabwean' or foreigner issue at its CORE, but rather a case of the poorest of South Africans seeing their livelihoods being taken away from them, albeit by foreigners. They are sliding off the bottom of the economic ladder as the once thriving South African economy starts to feel the effects of impinging global inflation and a limited local power supply. An economy simply can not grow without an increase to its power supply. It is that fundamental. If the economy was healthy our South African and Zimbabwean brothers would gladly work side by side as the jobs would be there, instead of the former hacking, clubbing and torching the latter. Jobs do not exist though, and inflation, whether from external or internal sources is the root cause of this. Furthermore, ask yourself why there are an estimated three million Zimbabweans in South Africa in the first place? Yes, inflation that's correct. Or to be more accurate, hyperinflation. Zimbabwe used to be the bread basket of Africa . A prosperous nation which produced and exported. Mugabe sabotaged the root of his economy when he took away the productive capacity of its farmers with his political policies. Now Zimbabweans have to emigrate in search of money to keep their stomachs from shrinking. They can not even feed themselves let alone the rest of the region. Not very pretty is it? You see the cause for concern here? One day expensive commodities, the next day food riots in thirty countries around the globe. This is not the time to stick one's head in the sand and pretend all this unpleasantness will go away on its own.
Inflation will be emphasised in Botswana where the great majority of our consumer goods are imported. Maybe the Ostrich does see this coming and is powerless to act. Maybe BoB watch the Bloomberg Channel and are emulating the US Federal Reserve Chairman, Ben Bernanke as he manages not inflation but 'inflation expectations'. This is also the perfect ostrich mentality which says that if we can manage and control people's expectations so they think there is no inflation, then indeed there is no inflation. This is self denial and delusion in the extreme.
Maybe the Botswana government. wants to earn more Pulas from its diamond exports?
'That's no bad thing' I hear you say. More Pulas and we are richer as a nation. Yes, true but let us stock pile those Pulas or even better buy and hold real commodities which will hold their value as all currencies race toward the abyss. Let us not inject those Pulas back into the economy in the hope of good inflation. Good inflation will only last as long as our industrious nation produces. Yes, truly rich nations like the former Zimbabwe are productive ones. By that we mean the manufacture and production of proper tangible goods and commodities rather than the endless paper shuffling of the financial institutions and service industries. But producing alone is not enough. We need to sell our goods. We should all be aware by now of the tenuous wealth of Botswana diamonds from the 'diversification' mantra that has been echoed over and over since our independence.
How much more fragile will that particular revenue stream be in a global downturn? A global recession where discretionary items become luxuries and former luxury goods like diamonds remain unsold. We saw the reverse in Zambia with its copper. Botswana prospered as Zambia starved. Now the shoe will be on the other foot. So the question on everyone's lips is whether the US recession will ripple around the world. Some say that the Chinese and Indian economies are strong enough to withstand a global downturn. Let us pray to God that they are right as the alternatives are not attractive.
So let us be clear on this matter. There is one and only one root cause of inflation:
Increased money supply by central banks. Period.
All other economic symptoms are the result of this one core fact. All forms of price inflation stem from this and act as a hidden tax on the populace, eroding their purchasing power. We are not necessarily implying BoB is inflating although there have been rumours of an unspoken SADC banker's directive of bringing the Pula/Rand onto a 1:1 basis for many years. It looks like that idea has been railroaded for a while as South Africa deals with its own inflationary problems. But the argument is moot however as Botswana can import inflation just as easily as it can create its own. Inflicting local currency devaluations merely only hasten the process.
We can argue that the recent sharp rise in the price of crude oil and commodities (raw materials are the building blocks of economic growth) is a direct result of major nations increasing their own 'M3' money supply. M3 is the most comprehensive measure of how much money there is in a nation's monetary system. Look at these alarming year on year M3 money creation figures:
Australia 22%
Brazil 17%
China 20%
India 24%
Russia 44%
Singapore 23%
United Kingdom 12%
USA 17%
e.g. Russia has nearly half as many Rubles circulating as compared to a year ago. Imagine what this does to its real value and purchasing power.
To counter-argue that speculators are responsible for driving up these prices is also a moot point. Why do you think they have so much money searching for a home in the first place? Because the globe is awash with excess money and credit from loose Central Bank monetary policies i.e. printing too much money. Those of you who think the current commodity boom we are witnessing is a speculative bubble are in for a shock. Bubbles deflate when capitalist entrepreneurs satisfy demand by increasing supply. This time there can be no bubble as there will be no increased supply in the quantities required to assuage rising global demand - at least not until major economies have been slowed by recession as the equilibrium swings back into effect. This takes time. Basic commodities are in short supply now and for the foreseeable future. Global oil demand at $87 million barrel per day has now recently outstripped global supply of $85 million bpd. The Saudis have just begrudgingly agreed to pump more but what incentive do the oil producing nations have for pumping out their oil to be exchanged for rapidly devaluing petro-dollars when it is far more prudent to leave it in the ground and charge more for a limited supply? Why sell more for less when you can sell less for more?
Botswana is a commodity rich nation and thus it should husband its precious resources now more than ever, because in these coming times of rocketing inflation, these commodities will be the nation's lifeblood. Coal, methane gas, nickel, potash, beef and agriculture will be the new gems of our economy. These are the raw materials which represent real future wealth. We also need realistic commentary and policies from our economic experts. 'If you do not perform, you will lose your jobs' - now who did we recently hear say that? Maybe that rational should be applied to accurate, real world, inflation predictions. Otherwise we may soon have to replace that bird on the P20 note with the BoB logo.