Simple economics

Analysts say the government is making strenuous efforts to stabilise the economy, running a budget surplus for the first time in years and refraining from printing money, a key cause of the hyperinflation of 2008.

Last month, the central bank raised interest rates to 50% to protect the local currency and has made transactions using the US dollar illegal.

Why not drop the local currency and use the US$ instead? Inflation would stop immediately.

The answer is of course:

“The trouble with Zimbabwe is a predatory elite that prioritises personal accumulation over public interest and service. Comprised of top ruling party officials, their relatives and friends”

Olson’s stationary bandits don’t always farm the population effectively…..

33 comments on “Simple economics

  1. And the elite are useless. Pres has to go to Moscow, but none of AirZim’s planes are airworthy, (lack of maintenance, apart from the 3 someone has pinched).
    Pres hires a Dreamliner but in Moscow the hire company demands payment in full, (@US$70k/hour).
    Pres tells Reserve Bank of Zim to transfer funds but they can’t as there is no internet, because there is no electricity and even if there was fuel the internet servers won’t run off the available generators.
    Internet restored for an hour, electricity bill goes unpaid, Dreamliner paid for, fueled and leaves Moscow.
    Pres ‘Crocodile’ Mnangagwa lives to embezzle and kill for another day.
    I blame Brexit.

  2. Because then they couldn’t print more money to pay off their debts of course! Everyone was saying how wonderfully that would have worked for Greece, how wonderful it would be if Italy could try it for the 36th time, so why should Zim be any different?

    Here, gander, try some goose sauce.

  3. BiG – I reckon default and devaluation might’ve been a better option for the Greeks tho. How does the current system benefit them?

  4. Großer: Everyone was saying how wonderfully that would have worked for Greece, how wonderful it would be if Italy could try it for the 36th time

    Unsinn. You’re excellent on other stuff.

  5. The euro instantly cut about 100k a year off the bank fees for the NFP I used to be the finance guy for. Members got that back in reduced fees, the bankers can go and cry for all I care.

    It also wiped out the exchange risk in doing stuff anywhere within the eurozone (we would book big events years ahead, and pre-euro be exposed to currency movements).

    Greece did default. Largest sovereign default in history. Ask Tim. Devaluation is the alternative if you have your own currency AND borrowed in it (which Greece did little of pre-euro since no one would lend Drachma). So now Greece can finance in the currency they use everyday, rather than in Marks, Swiss Francs, or Dollars. If you’re a bad credit risk that costs you more of course, just as it did pre-euro. Expecting to see different borrowers, especially serial defaulters, having similar borrowing costs, is silly. If the market forgot that lesson (it often forgets lessons) it was given an expensive reminder a few years ago.

    And being a strange, lesser-spotted classical liberal type, if the euro makes it harder for governments to borrow excessively, that’s good with me!

  6. MB,

    I feel I must have misexpressed myself. The majority view in this house was that Greece should not have joined the euro and that somehow that would have made its recent economic pains easier to manage. So everyone was saying how wonderful it would have been had Greece had its own currency. I fail to understand why then the complete opposite (dollarisation) is being suggested for another serial bankrupt country with a debt and devaluation problem.

    The point that a defaulting country actually wants to be and stay in a currency union (rather than leave) was very well made at the time by one of the excellent FT blogs, I forget which and can’t find the link. But it’s basically the same argument Tim is now making for Zimbabwe. I guess I just don’t understand why goose sauce is not good for ganders.

  7. Because it depends upon how bad the crisis is. As in medicine – shall we use the antibiotics or cut his leg off? Well, depends whether it’s a little infection or raging gangrene, doesn’t it?

    At 50% and above inflation rates abandoning the currency is usually – usually- the only way to deal with it. Devaluation and default aids in other circs.

  8. “Everyone was saying how wonderfully that would have worked for Greece, how wonderful it would be if Italy could try it for the 36th time, so why should Zim be any different?”

    Default and currency devaluation seemed to work pretty well for Iceland:

    https://tradingeconomics.com/iceland/gdp

    Its GDP is currently 20% higher than its pre Crash peak in 2007, while Greece’s is over 40% lower than its 2008 peak.

  9. It may be true that Greece’s problems were largely the result of excessive borrowing, but the point about their eurozone membership is that nobody would have lent to them in drachmas (or, at least, they’d have been a lot more circumspect about it). German banks (in particular) seized the opportunity to make loans in euros at much higher interest rates than would have obtained in Germany (it doesn’t seem to have occurred to them that interest is partly compensation for the possibility you may not get your money back). What could possibly go wrong?

  10. So. The Greek government is not quite as awful as that of Rhodesia, but if had been as awful then monetary union might have been a good idea?

    These apex predators really have got it coming to them. Haven’t they?

    On the other hand, if one assumes (no laughing at the back!) the votes aren’t rigged, it’s difficult to see why people don’t end up with the guv’nors they deserve.

  11. I mean, the Brtish electorate (among numerous others) keeps voting for people who sell their children and grandchildren into debt even before they’re born. The corruption and depravity is not only one-way.

  12. @chris Miller

    Actually during the halcyon days of 2000-2007, Greek bonds yielded a premium of less than 1% relative to German bunds.

    See fig 1. p.29
    https://www.bankofgreece.gr/BogEkdoseis/Paper2011124.pdf

    in 2011 they should have defaulted and left the Euro – the economy would not have shrunk as much as it eventually did. The reason why they did not was the pressure for them to stay because of the domino effect on the rest of the Southern periphery.

  13. Ken, it’s almost as if you’re talking of … what might one call it? Grexit?

    Yet. How might this madness be achieved, I ask!

    On a more serious note. Leaving, whether the EU, or the currency zone, has always been an act of political will.

  14. @Fatmatt July 22, 2019 at 11:34 am

    Pres ‘Crocodile’ Mnangagwa lives to embezzle and kill for another day.
    I blame Brexit.

    As will MSM, if not Brexit it will still be our/tories fault

    I blame independence and the Left & SJWs

    They wanted independence – allegedly – they got it; not our problem now

    It’s all: Oh dear, how sad, never mind

    Maybe Omar could fix Zim after she’s fixed Somalia

  15. @Bloke in Germany July 22, 2019 at 12:42 pm

    It also wiped out the exchange risk in doing stuff anywhere within the eurozone (we would book big events years ahead, and pre-euro be exposed to currency movements).

    Then “we” were stupid – heard of hedging, futures etc? Existed long before Euro.

    @uly 22, 2019 at 12:46 pm – “currency union”

    It wouldn’t be as USA would not set interest rates etc after taking account of Zim economy and Zim would have no access to Fed

  16. @Ken
    So if the banks weren’t lending to Greeks to get higher interest rates, why were they doing it? (Genuine question)

    Some years ago, I quizzed my German work colleagues as to why they believed the (very clearly dodgy) Greek government figures that showed they passed the criteria for joining the euro. “But of course we believed them” was the reply, “they were Official Government Figures”. (It should be noted that neither Germany nor France would have passed these tests, but exceptions were made.)

  17. Pcar,

    I usually can’t be bothered to respond to you, but hedging at that kind of level is (1) difficult because there are not a lot of options for tiny scale retail hedging (2) has costs that greatly exceed the elimination of currency risk that the euro brought us.

    In the context of an NFP, it is also basically impossible to explain to non-economically-minded people why you should do (what looks like) weird high-financial speculation bankster voodoo just to lock in a loss.

  18. OT: Alan Duncan’s ‘honourable’ resignation

    …Here are a selection of Duncan’s highlights:

    Leaving Vote Leave

    In 2016 it was reported that Duncan had lobbied Matthew Elliott, the chief executive of Vote Leave, to join the board of the organisation ahead of the Brexit referendum.

    When he was snubbed, Duncan decided instead to campaign for Remain, and went on to accuse his pro-Brexit colleagues of offering a ‘fanciful pretence’….

    https://blogs.spectator.co.uk/2019/07/alan-duncans-honourable-resignation/

  19. @BiG

    Then why did you say “big events” if it was “tiny scale retail”?

    The fees/commission were higher than the risk of say a 15% exchange rate change over the “years ahead” until “big” or is it “tiny” event held?

    Ever so kind of you to deign to reply to my awkward questions.

  20. @Chris Miller

    Didn’t Goldman Sachs produce those figures/report after temporarily assuming responsibility for a lot of Greek Gov’t debt by PFIing it?

  21. Default and devalue only works if the IMF/ECB (joke)/some other external institution is turning the thumb screws to ensure at least some credibility in the government and its policies.

  22. So if the banks weren’t lending to Greeks to get higher interest rates, why were they doing it?

    Firstly, in a very low interest rate environment, an extra 1 percentage point is a lot of extra return.

    Secondly, they might have had an inkling that Greece would never be allowed to default.

  23. A few observations.

    The lifetime of the euro coincides with many other financial innovations. The cost of doing business in all foreign currencies has fallen (with a card like Revolut the bid-offer on buying main currencies is <0.25% whereas through banks it used to be several percent). So the claim that the euro lowered transaction costs might be true – but if they have fallen for other currencies then you didn't need the euro to achieve that goal.

    Whilst Greece did default it did so in a stupid way and that stupidity is connected to the EU. In 2010 Greece starting receiving huge loans from the imf/EU in order to repay maturing bonds. Why would the state sector step in to rescue foolish private sector lenders? Many of those bonds were held by French and German banks. This was a backdoor bailout of those banks.

    Two years later Greece did default on almost all the remaining private sector debt. However a very large chunk of debt had converted to government to government loans and default on these is much much harder.

    If Greece had defaulted in 2010 it would have restructured to a sensible debt:gdp. Instead, even with the huge 2012 default debt:gdp is still 180%. If the solutions are devalue, deflate or default. They can't devalue. They can no longer default. They are stuck with the most painful – deflation.

    Why did Greece do this? 1. postponing the default was attractive to the then government (might not be their problem later). 2. EU was keen for Greece to take the money to avoid 2010 default and damage to FRF/DEM banks (and worries on ireland, portugal, etc). 3. The technical mechanism that lets EUR flow around the EU means that the EU has your nuts in a vice. See Capital Controls imposed on Greece in 2015.

  24. @BiG
    Curious how your economic arguments usually focus on the least important actors within economies. Business is simply the mechanism through which the consumer gets the goods & services consumed. Most the customers of most businesses are within the national economy & most goods & services consumed come from within that economy. Importing & exporting is just froth.
    So ask the Greek people how they’ve felt about being put on the economic rack, the past few years, to enable their government to stay in the Euro. Or the French gilet jaunes on the streets next weekend. It wasn’t the Zimbabweans debauched the nation’s currency. It was their rulers. Who now decree they can’t use the $US amongst themselves.

  25. Pcar, because big is relative. And we didn’t have clicky financial services on t’tinternet back in 1995.

    bis, I think the little people are actually the most important actors in economies. You might think it’s the billionaire wanksters, I don’t. And trade is not froth, Greece’s exports are over 30% of GDP.

    If you’ve run out of other people’s money it makes no difference, other than psychologically, if you get 40% less in future or devalue your unit of measure relative to the rest of the world by 40%.

  26. @Chris Miller

    To be fair a big chunk of the people buying Greek bonds were Greek banks. To the extent others did, it was because 1) Yields were slightly higher 2) There was a belief that no Euro area government would leave the Euro 3) In which case surely other euro area governments would bail out governments in trouble 4) benefits of diversification.

    Stupid in hindsight. That said the moronic banking regulations that were Basle II also made government bonds very attractive as they attracted a zero risk weight (so no capital had to be put aside to cover them) and made investing in Greek (and Spanish and Portuguese) debt attractive for banks.

  27. “You might think it’s the billionaire wanksters”
    No, actually I think it’s the mainly university educated middle-class parasite wankers. The sort of people voted most enthusiastically for Remain in the UK. That’s who economies tend to be run for because they have the sharpest elbows & loudest voices. Also borrow the most money.
    Costas & Maria, like Carlos & Maria here, work hard, produce more than they consume, watch the cents, live within their means & get screwed over & lied to on a daily basis..

  28. It’s not so much that people lent their spare cash to Greece for a couple of percent more than they could get in Germany or the Netherlands, it’s that they borrowed a gazillion at 3% and lent it on at 5%. The fact it was sovereign debt meant that the regulator said it was low risk and hey presto! 2% of a gazillion is a risk free return. Of course the financial geniuses at French and German Banks took a few billion of retail deposits paying less than 1% and ‘lent’ them at 5%, betting on ‘convergence’ to give them a huge capital gain on top of the spread. On a completely unrelated note, Deutsche Bank, Soc Gen and Paribas have all taken big write offs and sacked thousands of staff since then (although the genius traders are long gone).

  29. @Bloke in Germany July 23, 2019 at 9:21 am

    Pcar, because big is relative. And we didn’t have clicky financial services on t’tinternet back in 1995.

    Relative? Yep sure is; so why did “big” become “tiny” in a few hiurs?

    Hmm, in April/May 1992 I and CFO foresaw Major’s ERM collapsing. I walked into RBS HQ branch and bought a £50k DM 1 year forward – fee was 1%; fee more than covered by loss avoided. No internet required.

    Are you inventing “facts”?

    .
    @bloke in spain July 23, 2019 at 10:17 am

    +1

    .
    @Mark T July 23, 2019 at 5:45 pm

    +1 Deutsche Bank has been a covered up implosion for years, Arrse QT thread knew & posted this

    Godfrey Bloom: Deutsche Bank; I told you all seven years ago
    https://www.youtube.com/watch?v=qje_EjqabPo

  30. Greece’s exports are over 30% of GDP
    The bulk of that being agriculture and tourism. Before the euro, people went to Greece for the nice weather and nice people and because you could get a coffee or a beer at a seaside taverna for a few pence and a pleasant meal for a quid. The day after joining the euro, all these prices went up to be roughly the same as France.

    For a more direct comparison, look at Slovenia (euro) and Croatia (kuna). Slovenians complain that cars now cost the same as in Germany, but wages haven’t changed.

  31. For a more direct comparison, look at Slovenia (euro) and Croatia (kuna). Slovenians complain that cars now cost the same as in Germany, but wages haven’t changed.

    Which was kinda the point of making the Euro compulsory for ascension countries. Far less dramatic than sending tanks rolling across the landscape, but just as effective at enslaving the natives.

    Frankly I want no part of it.

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