Monday, October 3, 2011

Mugabe to the rescue

Desperate times call for desperate measures, so goes the oft-quoted proverb. The politicians are well aware that the current dire situation has caused them to freeze up like the deer caught in the glare of headlights, not knowing which way to go. This is a result of the democratic checks and balances that are intended to prevent domination by any one of the three governing branches. However in governing, you must be able to switch from democratic to authoritarian methods as the situation demands. But the constitutions of all democratic nation-states do not provide for such a privilege.

Ancient Athens and Rome were more enlightened in this respect. We've seen in the previous post, The 'Greek' hold the answers to the euro crisis, how the ancient Greeks turned to Solon for autocratic leadership in 594 BC though it was probably the only time that the Greeks did so. The ancient Romans were much better; when faced with a major crisis during the time of the republic, they would appoint a dictator known as dictatura rei gerundae causa (dictatorship for getting things done) for a period of six months, enough time to lead the Romans in their wars which were fought only in summer.  The appointment of the temporary dictators occurred between 501 and 202 BC. Rome had other types of dictatorship but these were less common than the rei gerundae causa. Ordinarily the Romans would be governed by two consuls who would decide when a dictator was needed.

In 82 BC, the six-month time limit was breached when Sulla became a dictator for one year to suppress a civil war and amend the constitution. With the precedent set, Julius Caesar subverted the governing privilege when he declared himself a dictator for life in 44 BC though he didn't get to enjoy it for long as he was assassinated in the same year. Upon his death, his adopted son, Augustus, made the change official when he transformed the republic into an empire, though still maintaining a veneer of the old republic in the form of consulship and senate.

Our present dire situation now doesn't involve any war or constitution amendment but it might lead to more worrying conditions if the current crisis is not urgently addressed. The first thing to getting things done is to immediately tackle the debt crisis. Would this solve our real problem, which is the capacity/consumption crisis? No, but it will give us some respite and in a crisis that's many times preferable to stasis. Even with the cancellation of debts, wealth accumulation enjoyed by the affluent will continue unabated as if the cancellation is only a minor pullback. The debt crisis may recur but hopefully the paradigm of the fifth Kondratieff wave will precede it and destroy enough wealth so that mankind can pursue its new wealth accumulation game afresh.

Since no creditors would want to see their debts written off, we would need to explore some creative ways to magically siphon the creditors' financial savings, i.e., debts due them, off their books. For this, we have to call in Mr. Mugabe, a dictator that can get things done, albeit in a negative sort of way. He may not know much about economics but his mastery of money printing anytime thumps that of Ben Bernanke. The problem with the US is that people from the academia, who are too clever by half, are at the helm of the White House and the Fed.

Bernanke's grasp of money printing is flawed. Printed money is not money in the economic sense until it is spent, that is, it doesn't matter a whit to the economy if you print to hoard. To do the spending, Bernanke needs Obama: Bernanke prints and Obama spends. Only then can money supply shoot through the roof. In the case of Zimbabwe during its hyper-inflationary days, Mugabe had full power to execute both, which he did, unfortunately, too well. Mugabe's money printing was not a recent phenomenon, it had been going on since Zimbabwe's independence in 1980. Only in 2008-2009 did it rapidly intensify, the inflation rate, last recorded in July 2008 reaching 231 million percent annually before official inflation statistics stopped being filed.

By April 2009, the Zimbabwean dollar officially ceased being used, replaced instead by the US dollar and the South African rand. However capital flight continues to afflict the country as the country is effectively broke. The country's productive capacity has been severely curtailed with good farmland, expropriated in 2000 and turned over to cronies, being laid to waste. Now its foreign-owned mines, banks and factories are targets for seizure, ensuring further collapse of its capacity. Mugabe is economically dangerous if given a free rein. To benefit from his expertise, not only must his remit be restricted to the cancellation, or rather whittling down to nothingness, of most debts, but also his term be limited to only one month.

What damage has Mugabe wrought on the Zimbabwean dollar (Z$) as to cause its disappearance? In short, his money printing has become too efficient. If only that could be said of his country's productive capacity. To bring on hyperinflation, printing alone is insufficient. You must also add on countless zeroes, followed by a downward redenomination to slash the added zeroes. In the case of Zimbabwe, after three rounds of redenomination, all in all, 25 zeroes have been slashed from the Z$. The highest denomination ever printed was Z$100 trillion. Just imagine if the US dollar were printed in this denomination, a piece of this bill would have been enough to redeem all the world's holding of US treasuries with plenty of change to spare.

Printing money is only one half of the equation. Spending the printed money completes it. Once the bills are printed, they must be spent immediately in a 'shock and awe' way to preempt the holders of the financial savings from switching to gold or commodities. The easiest way is to flood the banks as settlement for all mortgage and other debts owed by individuals and corporations. The public would be happy that the banks as creditors get paid in devalued bills, and the banks shouldn't have any qualms as their problem loans would vanish immediately. All homeowners will get back their previously foreclosed homes. The final step is to erase the trailing zeroes from the bills by redenominating them in new US dollars, say a new US$1 for every old US$1 million. It must also be done quickly; otherwise the goods will disappear from the shelves. Of course, there are losers. China's forex holdings would be worth US$3.2 million. Even Sun Tzu would have marvelled at this money conjuring stratagem. Those holding treasuries and with substantial financial savings will find their wealth disappearing in front of their very own eyes. Not to worry, if they were successful before, their success in accumulating wealth would remain.

Those countries which have been fixated with squirreling forex reserves would now be wary of repeating it. Every country would trade with each other in a responsible manner. But most will wind down their international exchange, producing at home for home consumption. Where things need to be traded, they will be carried out on barter. Anyway, even without this extreme devaluation, trade barriers will go up in an economic depression. Any leaders still enamoured of free trade will be booted out of office in next to no time.

But wait, don't switch your savings to gold yet. This is just wishful dreaming because reality is still Nightmare on Wall Street.

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