Economics: Focus on Zimbabwe:
How Shall We Defeat Disparities of Wealth and Status?
by Edward Ingram
Economist; Founder, Ingram School of Economics
In days gone by, for many there was no unemployment. Nor were there any savings or lending banks. Life went on and people paid one another without recessions, depressions, or super-exuberance.
The world’s economies are chaotic by nature. There are too many targets for monetary policy to be able to cope. This is a massive waste of resources. It causes monumental amounts of damage including social damage, ruining millions of families and businesses worldwide every year. Governments fall because of it and their replacements know no better.
The reason is quite elementary, but no one has addressed it before.
Prices are supposed to adjust to balance supply with demand. Doing that optimises the use of the resources in question. Yet legislation, taxation, regulations, and the traditional wish to control everything, have all played a part in preventing this from happening.
Savings with government debt, the value of the currency, and the cost of repaying housing and commercial finance do not adjust as they should because they are all wrongly organised in one way or another.
The best place to begin the reforms needed may be Zimbabwe.
Whereas living in any of the world’s economies may be likened to travelling in a stage coach, the wheels hitting rocks and stones along the way and at times having a wheel fall off, the new Zimbabwean economy could be more like a riding in a car on a tarmac road.
Why start with Zimbabwe?
Because the government is now interested in looking into it, the universities are already beginning to teach it, and the author, the principal teacher, lives there.
The problem with money today is that everything connected to savings and loans, imports and exports, and the value of homes – and many things besides – feels unsafe and unstable. Because that is the case. At a deeper level still, we have lost our ability to create a balanced and harmonious whole, which is the love of wisdom.
But we think we can stabilise all that, and end the way in which much of the disparities of wealth and status grow. A few examples will help us clarify the concepts.
EXAMPLE 1. Let us start with savings and debt, variously known as Treasuries, Bonds, and Fixed Interest Savings. These offer a savings or investment contract of no known value – just a maturity date when they must repay the money. Some of the interest paid is to cover the risk to the investor of not getting full value back. Instead, one may offer a contract index-linked to Nation Average Earnings (NAE). We shall refer throughout this post to NAE.
That would protect the value, although there is not space here to explain exactly why. It has to do with trying to get all prices, costs, incomes, and values rising at the same pace as NAE. If that were the case, then no one would be affected by the falling value of money. Over a period, prices might double, along with everything else which must be paid for, such as costs, assets, and incomes – and someone must pay incomes. Everything therefore costs twice as much, but people have twice as much income. The two things cancel.
This concept was put forward by the renowned economist John Maynard Keynes in his A Tract on Monetary Reform in 1923. If this were to become reality, it would create what I have called Keynes’ Floating Prices Platform (KFPP). As in the above example it is inflation, the falling value of money, which transfers much wealth away from the people to the big investors and institutions. Anything helping to create this platform would be counter-productive to the big investors and institutions.
What was omitted from Keynes’ idea was that, in addition to that kind of pricing adjustment, there are the real economic prices and costs, which people negotiate with one another. If there were no falling value of money, prices would still be changing. Price adjustments have two parts. But does the core offset price adjustment, needed to counter inflation, happen? It cannot happen if, as in the case of fixed interest bonds and treasuries, the maturity value is not in some way linked to the rate at which all other prices are rising.
By linking as much as possible to NAE or allowing prices, costs, and values to adjust themselves, we can close most of the gap. Any price which is not index-linked to NAE, or which does not rise as fast, becomes cheap. Demand increases and that may float the price upwards (KFPP) and solve the problem. If it were quite as simple as that – but some prices rise before others and some prices are ‘sticky’.
On investigation, if we alter the various taxes and regulations, contracts, and some market places, and end interventions which get in the way, we can almost get there. Furthermore, if any price does behave like that, then it will not be too cheap, or too expensive. The resource in question, for example credit (savings too), will not be wasted. The use of every resource optimises giving them to those who can best use them.
EXAMPLE 2. Mortgage finance – one repays 30% of income in the first year – that is normal for a single borrower. Reduce the number of NAE repaid every year by 4%. It is all repaid after 25 years. The figures include some interest. The amount which can be lent this way does not vary much. Property values won’t vary with nominal rates of interest. ‘Loan: Income’ multiples are not excessive, or too small, and one third of the economy can get on with its business without huge undulations in supply and demand. More homes will be built. More people will have permanent jobs, rather than ‘sometimes’ jobs.
In both cases – both bonds and property loans – money and asset vultures are deprived of rich pickings. They can no longer pick up the cheap assets of the fallen. People will not be deprived of their family homes, savings, and good businesses. They will not go through hell wondering how to cope with the latest economic crisis and cost increases.
EXAMPLE 3. Pension funds can advise, ‘Give us 10 NAE over your lifetime. You will retire with 10 NAE (invested, for example, in government debt and mortgage and commercial finance), and you can have 0.5 NAE for twenty years, or a different figure, for life. Your pension and your savings will rise as if you were still getting wage rises – as if you were still working.
EXAMPLE 4. We can also look at the value of the currency – the exchange rate. If we can get the price right, it will be stable for trading purposes. But while we allow money people to get a handle on the price of the currency, we will always see that the price is wrong, uncertain, and doing a lot of damage to businesses everywhere.
One routinely hears in news reports that the central bank is worried about all of the above. Everyone is guessing, too, not only about what the data will do next, and how people are behaving, but what the central bank and the politicians will do in response. Talk about complicated and confused!
It would be far better if the central bank ensured that we have enough money to pay each other and allowed interest rates to optimise – to adjust themselves. How can that be done? It is complicated but do-able. To avoid recessions, central banks must stop lending new money into the economy all the time. There can be too much debt. This solution is simple. Create money and give it to the people to spend. Then banks won’t have to create money by lending more all the time. Recessions will be hard to create accidentally. When spending is excessive, and all prices are rising, KFPP will protect us all from the misery and the vultures at the top. After the price rises, more money is needed. To avoid the slowdown, give both banks and the people more money to spend. Everyone wants to spend more. Now we are all employed, and our distress is relieved, being worried merely about a little inflation from time to time.
Could the trade unions break this with perpetual wage claims up to and above NAE? That is down to politics and power. A healthy economy will provide more than enough jobs, and the competition will raise wages – as happened in Hong Kong and some of the other Asian Tigers. Ultimately, again, it is down to the love of wisdom – the wisdom of a better balance in society, which we may obtain.
Could the government pump too much money in and create hyper-inflation? All nations eventually get a government which does that. They need to have a process whereby a committee is elected by the community which has the role of lacing a cap on how much new money can be created. All such proposals must be passed by that committee before the money may be created.
© 2018 The Bibliotheque: World Wide Society