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Ncube Is Right About The Zim$ Here – Liberalise The Exchange Rate, Not A New Curreny

That Zimbabwe is still having problems with it currency and money supply is obvious enough, the debate is over what to do about it – here Nucube at the central bank is correct. Liberalise, preferably completely, the exchange rate rather than introduce yet another new currency. For the problem isn’t in fact that there’s too much or too little money around, it’s that the price of it is wrong. Get the price right and all the other problems go away.

Well, the political problems don’t but the economic ones do. Ncube still being correct therefore:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Mthuli Ncube, Mangudya in bitter fight over new Zimdollar[/perfectpullquote]

As I say, Ncube is right here:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] However, disagreements over proposed currency reforms has seen the MPS stall to a point that requires executive intervention. Several options to deal with the currency crisis include, redollarisation, reintroduction of the local currency, rand adoption, liberalisation of the RTGS and bond note as well as ringfencing deposits to mop up excess liquidity to lower the premium rates on the US dollar. It is believed that while Mangudya and his team tabled local currency re-introduction as the most viable option under the current circumstances, Ncube is only prepared to go as far as liberalising the exchanging rate, an option preferred by the Bretton Woods Institutions. According to Ncube, a local currency can only be introduced within 12 – 18 months. [/perfectpullquote]

Just to run through a little history, there was the Zimbabwean dollar which Robert Mugabe’s lads then printed the hell out of. Leading to the hundred trillion dollar notes not worth enough to buy the ink for the next print run.

So, use someone else’s money instead, Rand, Dollars, Pounds even. Economically that worked, there was money to be used as money. Politically it didn’t work as it meant that the local government didn’t have the power to print money to spend. So, in come the RTGS and bond notes. Whatever the details of them they’re really just money that the local government can produce at will – fiat currency. So, what happened then? Lots was printed so that local government could spend lots of cash. So, the value fell and that’s what’s happened this past year or so. Formally they’re worth $ for $, in reality maybe 1:4.

So, introducing a new local currency. Do we think that third time lucky means that local government, that of Zimbabwe, isn’t going to print to much of it? Actually, given that it’s third time that doesn’t even matter. Do Zimbabweans think that? For if they think the currency will just be debauched again then it will be debauched as they anticipate future value losses.

This leaves the only other option, just freeing, entirely the exchange rate. For there’s endless complaint that there just aren’t any foreign currency bills around in Zimbabwe. Why? Gresham’s Law, bad money drives out good. Anyone gaining access to a USD bill would be mad to swap it for local currency of any form. Therefore they don’t.

In a fully free exchange rate regime they will do. At a price, of course. That price being whatever it takes to loosen their hold on money of stable value. Sure, the exchange rate plunges. But there will be no shortage at that new price.

Ncube is right here. The solution to the Zim $ problem is simply a complete and total free market in the exchange rate. That’s in economic terms of course, it doesn’t solve the political problem at all. It denies the government of Zimbabwe the ability to print hell out of the new currency – exactly why it works in economic terms of course.

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