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ED and the economic melt down

03 Dec 2018 at 19:22hrs | Views
As Zimbabwe entered into the end of the first year without Cde Mugabe, elites all over the country were gripped by austerity fever, a strange malady that combined extravagant fear with blithe optimism. Every country running significant budget deficits – as nearly all were in the aftermath of the financial crisis  are deemed at imminent risk of becoming an economic ghost unless it immediately began cutting spending and raising taxes. There are concerns that imposing such austerity in already depressed economy would deepen depression and delay recovery, this should be airily dismissed; fiscal probity, Zimbabwe must be assured, Austerity would inspire business-boosting confidence, and all would be well. Zimbabwe will role again and the only way of managing our economy is to be able to control it.

Zimbabwe needs people with positive thinking, those who are aware that the medication is sower but effective. Sweet medication is for kids and adults need more sower medication for their health. People who hold their heads above the waters in the austerity situation are called "austerians" a term coined by the economist Rob Parenteau and for a while the austerian ideology swept all before it.

We should understand that the economic dust bin we find ourselves in was not caused by the current government. The current government is caught in the cross fire. The previous authorities have dipped their hands into the waters which needed to be boiled. But that was years ago, and the fever has long since broken the previous regime is now seen as it should have been seen from the beginning - as a unique case, with few lessons for the rest of us. The new dispensation is steering the country which is cashless and jobless back into the pool of prosperity. It is impossible for countries such as the US and the UK, which borrow in their own currencies, to experience Zimbabwe style crises, because they cannot run out of money they can always print more. But Zimbabwe is a test case, it cannot print any currency it has no currency of its own so in any way determining a price is hard when you have no money of your own. Our budget is measured in foreign currency and we are sovereign.
Zimbabwe must get comfort in that since the global turn to austerity in 2010, every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity. But in few years the countries gained much more than they suffered in the austerity times. This is the same way Zimbabwe is going now. We will suffer now but we will be ok in the very near future. Ours is not for the stomach but it is for the future.

Yes it is true that the Reserve bank can respond to a temporary economic downturn by cutting interest rates; this encourages private spending, especially on housing, and sets the stage for recovery. But there's a limit to how much they can do in that direction. Until recently, the conventional wisdom was that you couldn't cut interest rates below zero. We now know that this wasn't quite right; still, there can't be much room for sub-zero rates. And if cutting rates all the way to zero isn't enough to cure what ails the economy, the usual remedy for recession falls short. Taxing people is not the austerity way, austerity is when the government spending is cut, government funding is halved and government is encouraged to save.

So it was in 2008 it was already clear in every major economy that conventional monetary policy, which involves pushing down the interest rate on short-term government debt, was going to be insufficient to fight the financial downdraft.  The textbook answer was and is fiscal expansion: increase government spending both to create jobs directly and to put money in consumers' pockets; cut taxes to put more money in those pockets. The results were catastrophic for Zimbabwe, we all know what followed. So cuts will give us the opposite of the 2008 dangers.

But won't this lead to budget deficits? Yes, and that's actually a good thing. An economy that is depressed even with zero interest rates is, in effect, an economy in which the public is trying to save more than businesses are willing to invest. In such an economy the government does everyone a service by running deficits and giving frustrated savers a chance to put their money to work. Nor does this borrowing compete with private investment. An economy where interest rates cannot go any lower is an economy awash in desired saving with no place to go, and deficit spending that expands the economy is, if anything, likely to lead to higher private investment than would otherwise materialise.

It's true that you can't run big budget deficits for ever (although you can do it for a long time), because at some point interest payments start to swallow too large a share of the budget. But it's foolish and destructive to worry about deficits when borrowing is very cheap and the funds you borrow would otherwise go to waste.

At some point you do want to reverse stimulus. But you don't want to do it too soon - specifically, you don't want to remove fiscal support as long as pedal-to-the-metal monetary policy is still insufficient. Instead, you want to wait until there can be a sort of handoff, in which the Reserve bank offsets the effects of declining spending and rising taxes by keeping rates low.  "The boom, not the slump, is the right time for austerity at the Treasury." But a mixture of both gives desired results.

All of this is standard macroeconomics, those of who protested against the turn to austerity were staking out some kind of heterodox, radical position. But the truth is that mainstream, textbook economics not only justified the initial round of post-crisis stimulus, but said that this stimulus should continue until economies had recovered. Economies do not recover in a day.

ED is catering to a public that doesn't understand the rationale for deficit spending that tends to think of the government budget via analogies with family finances. The opposition is opposing austerity on the basis that families are tightening their belt, but they don't see government tightening its belt," economists cringed at the stupidity. The families are suffering as much as the government is doing. We need to take some injuries in this fight for recovery. There is no war without bruises, and deaths.

Let us not, however, be too harsh on the public. Many elite opinion-makers, including people who imagine themselves sophisticated on matters economic, demonstrated at best a higher level of incomprehension, not getting at all the logic of deficit spending in the face of excess desired saving. There is going to be, a very painful tug-of-war between our monetary policy and our fiscal policy as the markets realise just what a vast quantity of bonds are going to have to be absorbed by the financial system this year. That will tend to drive the price of the bonds down, and drive up interest rates.

Beyond these economic misconceptions, there were political reasons why many influential players opposed fiscal stimulus even in the face of a deeply depressed economy. This is because there are party and national leaders who are benefitting from the economic jungle.

In a way, the remarkable thing about economic policy was the fact that the case for fiscal stimulus made any headway at all against the forces of incomprehension and vested interests demanding harsher and harsher austerity.  If this is right, there is inevitably going to be a growing backlash - a turn against stimulus and toward austerity - once the shock of the crisis is off.

the problem we are having in these measures is that even those within the party are seriously against the austerity measures. There is no support within. Most people who shout the slogans loudly are the ones who wait in glee for the austerity measures to fail. The system of undermining the status quo is self-defeating and it causes big problems within the radical changing economy.

The austerity moment from the beginning, there are plenty of people strongly inclined to oppose austerity? But they had a problem: their dire warnings about the consequences of deficit spending kept not coming true. Some of them are quite open about their frustration with the refusal of markets to deliver the disasters they expected and wanted. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.

Still, what about the depressed state of other economies? The post-crisis recession bottomed out in the middle of 2008, and in most countries a recovery was under way, but output and employment were still far below normal. Wouldn't a turn to austerity threaten the still-fragile upturn?

Looking at the history of great depressions world over the only way out is austerity. The government leaders must be starved of the luxuries they have been used to, they must be taught to suffer together with the masses. Austerity must be felt by all and must bring good results to all. The problem ZANU PF has is that it is swimming through the austerity at a time the previous regimes misdeeds are still fresh in people's minds.

For the party to get the best for the nation the very party must unite and the money makers' corrupt bandits must be weeded out. Without that unity of purpose the plans to revive the economy will surely fall flat before us. Zimbabwe has experienced prolonged times of collecting money without making revenue. Prolonged times of plunder without replenishing the loot, these times have come to an end.

It is now that ED is trying to pull back what was pulled down. This is the time we need each other more than any time.

As the Conference progress the theme is befitting Zimbabwe is open for business. We need to open our hearts for business too.

vazet2000@yahoo.co.uk

Source - Dr Masimba Mavaza
All articles and letters published on Bulawayo24 have been independently written by members of Bulawayo24's community. The views of users published on Bulawayo24 are therefore their own and do not necessarily represent the views of Bulawayo24. Bulawayo24 editors also reserve the right to edit or delete any and all comments received.

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