Zim government is at it again

Here we go again: Zimbabwe’s government made clear its plan to manage the economy through monetary and fiscal policy in 2010. From AllAfrica.com:

Harare — THE Government is considering re-introducing the repo rate months after it fell away as the country grappled with challenges brought about by a hyper-inflationary environment.

The repo rate is the rate at which a central bank repurchases Government securities from commercial banks, depending on the level of money supply it decides to maintain in the country’s monetary system.

At present local commercial banks are using the Federal rates determined by the American Federal Reserve in the absence of the repo rate.

Note the second paragraph above; read it again. Two important facts stare you right in the face:

1. the government issues debt securities in the market (revenues which help finance public spending); and
2. the central bank buys or sells these government securities at a predetermined rate to or from commercial banks, depending on the level of money supply it decides to maintain in the economy.

It should be clear that the two government entities are in cahoots and control very important aspects of the economy: government spending and the money supply.

Zimbabweans are at present free to choose which currency they’d like to use: some use gold, some use US dollars, some use Rands, and still others use Botswana pula. Nobody is using Zimbabwean dollars, because Zim dollars don’t have purchasing power – they aren’t worth anything in exchange. This was the government’s fault, as it conjured too many Zim dollars out of thin air to buy its own government’s debt, hyperinflating the currency out of preference and hence, existence. And this is where it gets interesting: now that the citizens have chosen their free market currencies, in order for the government to have its new currency used in exchange, it will have to impose it upon the people through legal tender laws. If the citizens refuse to accept the new currency in exchange for goods or services, they’ll be liable for criminal prosecution. Free market money in Zim today are the monies the people have chosen to use in voluntary exchange. Once the central bank and government comes onto the scene and forces a new currency on the people (something it’ll have to do in order to control the repo rate), and makes the use of other monies illegal, it will be taking away the people’s economic freedoms.

It is interesting that Fin Min Tendai Biti did not mention that they’d need to reinstitute a new local currency, after all, there won’t be an effective repo rate without it. There is nothing wrong with not having a local currency, and the economy does not need a repo rate and its own currency unit to again embark on a path of growth and prosperity. If this plan comes to fruition, it will unfortunately be one of the first and most important steps the Zim government will be taking to kill its monetary freedom, and over time the economy for a second time.