Not every country can print its way out of the crisis
Correspondent | Monday May 4, 2020 15:43
Coronavirus (COVID-19) has spread rapidly to most of the world's population since it first appeared in China. Indeed, one of the difficulties of writing an article like this is to keep up with the pace of change.
The effects of this crisis are already threatening the global economy. Governments all over the world are faced with the only choice of using money to save the world. This money is either printed from those countries' reserve banks, or some sort of loan is sought. Bystanders have asked themselves, why do we have to donate? Why can't the country just print money to solve the effects of the crisis? Ideally, this is giving every household and company enough money to solve all their problems.
Unfortunately, this is not the case. First Mother Nature loves redundancies, the one that seeks 'to have' in excess, defensive redundancies, the insurance type, one that allows you to survive under adversity. These redundancies include a country having more than enough medical doctors or one having more foreign reserves than it will ever need. Or even households producing more food than they consume for example. We have all come to realise that this is not the case, no country can ever have enough medical doctors for example.
We all hate the outcomes of debt, even William Shakespeare did not like debt, “Neither a lender nor borrower be” – Hamlet. It is a well-known reality that those without enough will have to borrow from those with surplus.
Recently when South Africa's finance minister was asked the question of why South Africa did not print money for the economic stimulus against COVID-19, he gave a vague answer saying that he had already explained that they are sourcing funding. In fact Black Twitter and the EFF were rife with this question. Tito Mboweni most likely did not want to explain that South Africa cannot afford to print money.
The United States is the only country in the world that has arguably unlimited powers to print money to solve any problems it faces. This is because the dollar is the currency of the world. Before the dollar took over, the pound was the currency of the world. The history of the creation of money in particular of the dollar dates back to 1914, when the dollar was backed by physical gold. Gold was used as a storage/numeraire repository of value because it would always maintain its value.
In Roman times, and throughout the Middle Ages, salt was highly valued due to its important use in preserving food, especially meat and fish. Soldiers in the Roman army were sometimes paid with salt. Their monthly allowance was called “salarium” (“sal” being the Latin word for salt). This Latin root can be recognised in the French word “salaire” - and it eventually made it into the English language as the word “salary”. In the Mediterranean, Venice fought and beat Genoa in a war over salt.
In Botswana, as it was the case with other African countries, cows were a symbol of this storage of value. They were traded and given as gifts to reflect the embedded value of a deal or an agreement. Lately, the world has had currencies that are not necessarily backed by governments, these are called cryptocurrencies. However, they have generally underperformed the four examples above (money, cows, gold and salt) to qualify as repository of value.
Some economists, bankers, and other finance professionals define money as “a store of value”. I agree with them, but I add a prefix to the definition to make it an “AGREEMENT to store value”. Money only exists when there is an agreement and if this condition is not there it fails to exist. When reserve banks “print money” there has to be an agreement from all stakeholders involved. Without this agreement, the paper will be worthless. First, there must be a market to receive the money, banks must be willing to borrow it from the government or the government must be having something they are going to do with it.
Money is created by central banks from thin air. The bank simply credits the Treasury account with the money and enters a debit entry in the government’s account. Effectively the govt owes the money to the Central Bank. If you print more money generally its value goes down, because it is no longer scarce. This is called inflation and has happened in neighbouring Zimbabwe and Venezuela, in South America, when these countries printed more money to try to make their economies grow.
As the printing presses sped up, prices rose faster, until these countries started to suffer from something called “hyperinflation”. That’s when prices rise at an alarming rate in a year. When Zimbabwe was hit by hyperinflation in 2008, prices rose as much as 231,000,000% in a single year. A sweet which cost one Zimbabwe dollar before the inflation would have cost 231m Zimbabwean dollars a year later. As we have seen with Zimbabwe, it is impossible to sustain economic growth in a high inflation environment. If a merchant hears the government is giving every Motswana P10,000 they are going to eventually increase the price of bread and often very quickly.
Unlike with the option of borrowing money the government can simply tell the reserve bank to write off the loan if it fails to pay it back. This results in the money staying in the economy with the inflationary outcomes. On the other hand, a loan from a third party has to be paid otherwise the government defaults and runs the risk of severe credit rating downgrades. Paying back the money removes it from the economy and stabilises supply to contain inflation within limits of the monetary policy of the reserve bank.
In contrast, the US Federal Reserve can print money without ever facing self-induced inflation. They can print the dollar knowing that should it breach supply levels it will still be demanded throughout the world for transactions. At this moment there is someone somewhere in Jamaica accepting the dollar to trade an item, another person in Beijing is offering a dollar for a good. At best one million people are trading the Pula at a given time during market trade, compare that to close to three billion people exchanging the dollar.
This comparison gets even worse if you consider that the maximum that can be traded in pulas cannot exceed $1 billion per day on average versus trillions of dollars. The pula is not even available as a currency to trade. It garners most of its strength from being pegged to the Special Drawing Rights of the International Monetary Fund (including the dollar) and the Rand. In the forex exchange market, roughly $6 trillion changes hands per day. This is a massive disadvantage to smaller countries and shows us that even under the demise of the global shutdown, America continues to have a massive outplay against the rest of the world.
In conclusion, the only available source of funding for most countries in the world remains largely debt, especially developing countries in Africa. The bottom line is, no government can print money to get out of a recession or downturn. Money is really just a facilitator of exchange between people, a middleman in trade. If goods could trade with goods directly, without a middleman, we would not need money. If you print more money, you simply affect the terms of trade between money and goods, nothing else. What used to cost P1 now costs P10 that is all, nothing fundamental or real has changed. It is as if someone overnight added a zero to every dollar bill and that per se, changes nothing.
Lastly, amid the uncertainty surrounding the global lockdown, the best you can do is be a stoic, be robust. Stoicism is a form of philosophy that teaches how to be even with life, how to lead a robust life, the kind of doctrine that encourages you to fare through adversity without shedding a tear, from which comes the truncated epigram “wear your best for your execution day and stand dignified, if you cannot control destiny, you can at least control your behaviour, you will have the last word!”
For me, I need to immediately withdraw into the platonic tranquillity of my Victorian library (my refuge from fair-weather friends) and read Seneca, punctuated by intermittent drooling over Finance and Risk Management problems and generally spend my life trying to get a few ideas across, thanks to this article. Then say 'goodbye', have a nice funeral at Molepolole at 'ko-ga-Rabeta', and like the French say; 'laisser la place aux autres', leave room for others!
Remember nature wears the crown, life will go on after this.
AFITILE EDWIN PUSO*
*Edwin Puso Afitile is a finance and risk management professional and a UK-qualified actuary based in Johannesburg.