Realist, not conformist analysis of the latest financial, business and political news

Zimbabwe’s Real Riots Problem – Modern Monetary Theory Strikes Again

That Zimbabwe hasn’t been well ruled since, oooh, 1965 is both obvious and well known. But it’s the quite how the ruling has been bad that interests here, not just the general driving of a once richer nation into the current penury.

The current riots are, on the face of it, about the imposed rise in fuel prices. But that’s not quite it – what it’s really, at heart, about is the application of modern monetary theory to the economy in Zimbabwe. This is also the second time in only a decade that MMT has caused disaster there.

That modern monetary theory just tells us basic truths about money in a fiat world. Governments just print money anyway so if they need more they can just print more. Entirely true. At some point, as they do so, they’ll start creating inflation rather than anything more useful. MMT does indeed acknowledge this, just as more conventional theory says that monetisation of fiscal policy will run into the same problem. Monetisation of fiscal policy and modern monetary theory being the same thing of course.

The conventional answer is to stop printing the money. Or to at least take the inflationary heat out of the economy through either monetary – raise interest rates say – policy or fiscal – raise taxes. MMT says raise taxes. OK, great.

The great and valid critique of MMT being that while government both could and should raise taxes at this point they tend not to. Thus MMT, just like monetisation of fiscal policy, leads to runaway inflation.

Zimbabwe already proved this once, they printed cash until the last batch of 100 trillion dollar bills Zim weren’t worth enough money to buy the ink to run the next print batch. That’s a really interesting inflation rate right there.

So, having killed one currency they decided to use everyone elses’. This worked, except the government was constrained in what it could spend, so, it invented two new currencies:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] The US dollar became the primary currency, but a shortage of dollars led to the Mugabe government introducing a parallel system of ‘bond notes’ and electronic payments that are notionally equivalent to the dollar. But in practice, the parallel currencies lost value against the dollar and currently trade at less than a third of the dollar’s value on the black market. [/perfectpullquote]

Why, yes, yes they did, they printed too much of the new currencies meaning they devalued against the US dollar and others that the Zimbabwean government did not control the issuance of. That is, there was inflation in the domestic currency again.

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] However, fuel prices are set by the government, which has maintained the official exchange rate so that consumers were paying less than a third of its dollar value. This has meant that the government was effectively providing massive subsidies for fuel and running up an unsustainable deficit, which led to further borrowing and electronic money creation that further devalued the parallel currencies. [/perfectpullquote]

Yes, they’ve managed to make matters worse. Because they’ve put up the price of fuel in those real, US, dollars. When the inflation was only happening in the bond notes and electronic money. This reminds of an incident back in the 90s. Back then I knew a number of Zim embassy staff. Mugabe doubled, or trebled, wages for civil servants to cover Zim $ inflation. The way it was phrased meaning that embassy salaries, already denominated in US $, doubled or trebled.

Still, the bottom line here, Zimbabwe’s screwed because of modern monetary theory. Again. Not because MMT itself is wrong but because it doesn’t account for the incentives faced by those in power. Thus MMT isn’t a power we want to give government, the reason being the sort of scum who get elected.

0 0 votes
Article Rating
Notify of

Newest Most Voted
Inline Feedbacks
View all comments
5 years ago

Thank you for being politically correct and equating the performance of the UDI years with the wholesale looting and genocide that came later.

5 years ago

This article has some muddled thinking behind it. It states that in modern monetary theory when inflation becomes too high the government needs to raise taxes, but it says that governments don’t do it so it’s not following MMT that is causing the problem.

Andrew Anderson
Andrew Anderson
5 years ago

Speaking of muddled thinking, the US economy, except for mere coins and FRNs, may not even use US dollars but is limited to private bank, credit union, etc. deposits, mere liabilities for fiat. Why is this important since Federal spending creates bank deposits 1-for-1 with the spending? Because when private banks, credit unions, etc. lend they also create bank deposits (“Bank loans create bank deposits”) and these too may cause price inflation. Moreover, it is huge government privileges* for the banks, etc. that allow them to safely create deposits in sums that exceed those created by Federal deficit spending. So… Read more »

Would love your thoughts, please comment.x