Happiness is... a printing press!

To laugh or to cry?  To get angry or to fob it off as unimportant?  These are the burning questions that eat away at me as I tap these words out.  Fighting back venomous vitriol I think I’m going to try my best to keep this post as calm and logical as possible.

Many of you would by now have read the interview the Financial Mail did with Cosatu head of policy and Wits economics professor Chris Malikane.  If his is becoming the pervasive economic view among the ruling elite then there could be some serious economic problems up ahead.  Mr. Malikane’s views are economically laughable at best, and potentially ruinous at worst.  That someone holding such an esteemed position at one of SA’s premium varsities is, to put it painfully euphemistically, discouraging.

In short, Malikane wants SA to print more money in order to create more jobs and growth.  This is such an old economic fallacy that it is somewhat tragic that it still needs to be refuted.  For centuries politicians have tried and failed to create wealth from the printing press (or, before that technology, debasing the coinage by diluting precious metals with cheap alloys).

It hasn’t worked for the US, it didn’t work for Zimbabwe, it didn’t work for Zambia, it didn’t work for Argentina, it didn’t work for the Weimar Republic, and it didn’t work for the Roman empire.  But hey, when has a little bit of pesky evidence ever deterred an economist?

Now before I get too ranty and ravey, let me just say that Mr. Malikane is not the object of my derision.  I have nothing personal against him.  Instead I will be attacking his ideas, which are not really his, but are made up of economic fallacies as old as human frailty itself and made most famous by one JM Keynes in the 1930’s.  It’s sad, but an undoubtedly bright mind like Malikane’s has been infected with some seriously horrible economic theory.

So I’m going to dive straight into the main idea touted in Malikane’s interview and sift fact from fallacy.

Fallacy: More money creates growth and jobs
Fact: Money is a medium of exchange and cannot create new wealth

Malikane: “The key variable to include [In the Reserve Bank’s policy mandate] is employment. And to target employment you need to use the growth rate as an intermediate target…We need to stimulate growth so we need credit.”

Even using the most basic logic this one is easy to debunk.  Money is a medium of exchange, not a factor of production.  The great illusion of history is that money = real wealth.  If this were true there would be no economic problem and Africa could be saved from poverty purely with new money creation.  This, as everyone really knows, cannot be.  Moreover, new money cannot create real demand because to buy goods and services we don’t actually use money but in fact use other goods and services.  When the central bank cuts the repo rate, commercial banks can access cheaper funding from the central bank’s vault of printed cash.  The money created out of thin air is pushed to households and businesses.

This money is used to buy capital goods, consumer goods and services.  But note, here the “demand” is not arising from other goods and services, it is arising from nothing and is therefore totally artificial.  This deception initially has the guise of economic success, but it quickly becomes apparent that the artificial demand simply causes producers to raise prices and labour to demand higher wages.  Once the inflation has set in, jobs that were created have to be destroyed again, and the entire system is no better off.

Malikane makes a number of other statements that stem from the above fallacy, while some of his other comments are just plain unintelligible and totally arbitrary.  Here are some examples.

If we want to maintain a certain ratio of public debt to GDP, then we need to structure the interest rate so that it corresponds to the growth rate. So, for example, our real interest rate must be at least equal to our growth rate, so that we have space to spend. Otherwise, spending is going to generate a huge increase in interest payments.

Seriously does this actually mean anything?  Readers are welcome to explain if it does.

If we maintain a positive interest rate while there is a negative growth rate, government spending can only generate huge debt.

???????

Why borrow when we can print money?

I don’t know, why live in the real world when we can live in cuckoo land and not have to deal with the real economic problem of production from scarce and precious resources?

In Zimbabwe they printed money even when they knew their potential capacity was very low. So they have too much money chasing too few goods. In SA, it’s the opposite: we have too little money chasing a lot of goods. So there are no sales taking place.

Back to the ‘money = demand’ fallacy up top.

It’s better to have 10% inflation and the protection of 1m jobs than inflation of 6% and the loss of 1m jobs.

Well we’ve tried that before and jobs didn’t come.  Inflation rose to 15% in 2008 and jobs didn’t come.  In mid-80’s inflation hit 20% and SA sank into recession.  Inflation has averaged 8-9% in 2009 so far and we’ve lost 1 million jobs.  Interest rates have been cut from 12% to 7% (repo) and we’ve lost 1 million jobs.  The US has zero % interest rates and unemployment has shot up to 10% officially and 17.5% using the Great Depression equivalent stats (U-6 unemployment).  The US has printed more money than any time in its history, and suffered a recession, job losses, bank failures and more.  From 50BC to the 3rd century AD, Rome debased its money and saw the collapse of the empire.  In the 1800’s Britain, France, Germany and America enjoyed massive economic boom while prices steadily fell for the entire century.

But as I said above, why let some pesky real world facts get in the way of using the good ol’ printing press?  It’s just so much fun…