Prosperity Vs Austerity (2) By Bola Ahmed Tinubu

 

The examples the Finance Minister offered against my recommendations were a bit odd. A person is unwise to draw analogies to the past without having sufficient historical grasp of the prior situations. The analogies will be prone to be off-centre as in this instance. The three circumstances she cited are far removed from what I advocate. Either the Finance Minister was being glib, woefully ignorant or both. If her intervention is indicative of her knowledge of history, our economy will be sorely pressed because her knowledge of the past will prove too superficial to do much good in the present.

As a result of losing WW I, Germany was burdened with an onerous reparations bill by the victors.  Famed economist, John Maynard Keynes, disparaged it as a “Carthaginian Peace” because the war damages exceeded the German capacity to pay without inviting national ruin. The damages amount to a confiscation intended to keep Germany in weak, indebted circumstance for perpetuity. The debt was to be paid in gold or in the currency of the creditor nation. Compounding the trouble, France and Belgium occupied the Ruhr, Germany’s industrial heart, reducing economic activity which further impeded the quest to pay the impossible war reparations.

Left with no other choice, Weimar printed vast amounts of its currency and bonds to trade for gold, pounds and dollars in order to redeem the annual war bills when they fell due. Forced payment of an exorbitant external debt causes Weimar hyperinflation. This situation is a far cry from a sovereign nation paying its own citizens a decent wage in its own currency for productive toil modernizing the nation’s infrastructural base. Instead of citing the Weimar predicament, the Finance Minister should have studied the different economic trajectories of France and England in the immediate post-war years. England adhered to gold-standard austerity economics. That nation fell into a recessionary trough. France exercised a looser peg to the gold standard and engaged in expansionary fiscal policy. The French economy was much healthier than that of its English Channel rival.

Zimbabwe was also cited. President Mugabe’s land redistribution and other policies caused inflation because these measures resulted in economic dislocation, resulting in diminished productivity and capital flight.  However, Mugabe’s hyperinflation came from another direction, an external shock similar to what crippled Weimar Germany. While fronting as a tough nationalist, Mugabe’s Achilles heel was that he borrowed liberally from the International Financial Institutions (IFIs) and private banks. Debt was denominated mostly in American dollars. The IFIs and banks had always rescheduled his debt as it came due. When he embarked on land reform, the Western governments that control these entities changed their policies. They blocked debt extension. The vast bill became due. His feet to the fire, Mugabe did the only thing he could. He printed Zimbabwean dollars that he may go into the market to purchase American ones. The more local dollars he printed, the lower their value fell against the needed American version. The more he printed, the lower the value fell. The more he had to print. This culprit unleashed the hyperinflation. Finally, Zimbabwe succumbed to the pressure, entering an agreement with the western nations. He gained partial debt payment relaxation after pegging his currency to the American dollar and South African rand, thus surrendering a huge chunk of his fiscal and monetary sovereignty to other nations. After the deal, Zimbabwean hyperinflation disappeared relatively quickly.

The context of Argentine hyperinflation is also vastly different from what I set forth. In the late 1970s-early 1980s, the nation opened its financial markets. A rush of government and private sector dollar-denominated borrowing took place. Later, the military government ‘socialized’ much of the private debt. It assumed the private debt. This amounted to a grant to big international and domestic business. It would crush the government under a heavy debt burden. Worse, this was a time of Reagan and tight money in America. Interest rates on dollar debts exceeded historic norms. To pay the spiraling dollar debt and interest burden, Argentina printed pesos in order to purchase the dollars needed to redeem the debt. Hyperinflation came.

My recommendations will not produce this situation. More instructive to our circumstance is the Argentine depression of 2001. At the best of the IFI’s from which our present government takes guidance, Argentina did a curiously destructive thing in the 1990s. It established a currency board pegging its peso the dollar at a one-to-one ratio that was purely convertible. Much of the government debt was converted into long-term, 10-year dollar denominated bonds. The peg placed the nation on a dollar standard that functioned like the extinct gold standard. It would prove to be just as deflationary and ruinous.

The nation’s exports became too expensive because the currency was overvalued. Earnings fell. Business activity shrunk. This was masked for a time by the influx of foreign capital taking advantage of the relatively high yields on government debt. The currency peg amounted to a trap. Due to the peg, creditors could lend government a peso yet demand payment of principal and interest in dollars. With the peso overvalued, this process effectively constituted a government subsidy to big investors. Worse, the peg-attenuated government’s ability to engage in expansionary fiscal policy because every peso issued became a potential dollar obligation. The government could not issue its own currency without incurring a proportionate contingent debt in a currency not of its ability to issue or control. Argentina had relinquished significant control over its monetary policy to those who control the dollar. In short, this was a calamitous attempt at turning a peso economy into a dollar one. It was as foolhardy as using a short rope to tie a canoe to the anchor of an ocean liner. Once the massive anchor was dropped that the canoe sank would become a certainty.

More apposite to this situation is present-day Greece. By entering the Euro zone, that nation slipped itself in a vise. With its goods denominated in Euro, Grecian exports shrunk because the exports had become more costly to the nation’s principal export recipients. These partners were not members of the common currency. Meanwhile, imports from Germany and other nations became cheaper and thus more plentiful. Also, European investors eagerly lent money to the Grecian government since bond yields in Greece were relatively higher than other euro zone countries. As long as creditors rescheduled the loans, things were fine.

The 2008 recession ended the merry ride. Creditors called the loans. Greece faced a sovereign debt crisis because it had forfeited its currency sovereignty to the euro zone. The EU, IMF and World Bank imposed austerity measures on the Greeks in exchange for debt relief. These “experts” forecasted the economy would grow and the debt would quickly reduce. The opposite happened. The nation was thrust into a downturn steeper than the Great Depression. The Grecian depression lasted six years. This year has seen modest growth. This growth is due to the tacit admission that austerity was too onerous a yoke. The Greek government was allowed to engage in fiscal expansion by passing an ambitious highway construction bill.

These brief accounts of prior crises show austerity works all the time. It always brings contraction. These accounts also show that what I propose is far different from the situations raised by the government. What I advocate and the examples they use to scare you should not even be mentioned in the same breath.

To be concluded on Monday

νTinubu is the National Leader of All Progressives Congress (APC)

The Nature and Function of Money in a Progressive Economy

My policy is to use our currency sovereignty to spur economic activity. Government should deploy fiscal policy to engage in non-debt deficit spending on productive ventures that modernize our infrastructure and provide jobs.  This is a far cry from nations printing money in order to purchase foreign currency to redeem foreign-denominated debt. One method is productive, the other promiscuous. They are as different as giving a shovel to your brother that he might help dig the foundation of the family house or giving the tool to an irate trespasser. That you may be hard struck in the later instance should come as no surprises.

An overview of how we now fund government will better explain my concerns regarding the path this government has taken. Nigerian oil is exchanged for dollars. The dollars are then used as the basis to calculate the naira to be given the federal government. This process basically treats our money as a finite commodity and not as the sovereign instrument of a national government.

 

Money is generally represented as a tangible thing; its essential nature is otherwise. To treat money as a commodity is a subtle but grievous error. Money historically has taken the form of cowry shells, precious metal, paper stamped with pictures of famous personalities, and electronic transmissions. The essence of money is not found in the thing used to represent it. Those things change over time and with technology. Money is an idea, a social convention. Money is the concept of storing economic value in an agreed medium so that value can be transported over geographic space and across time. Money is not the gold or the cowry. Money is the intangible idea these tangible things represent.

 

If the nature of money renders it more sublime than that of a commodity, its functional use should also transcend how we use a commodity. Money should be used in a manner that assigns appropriate economic value to all potentially productive labor, resources and capital within the nation. To attach money to these things requires that they are placed in productive use and in the stream of commerce. Conversely, that which has no money attached to it is idle and unproductive. A jobless man with no family or friends has no income and receives no relief. Being unproductive, he has no money. As such, he is deemed to have no economic value. Economically, an able human being has been reduced to a cipher. The goal of progressive macroeconomic policy is to liberate people from this dismal circumstance.

 

Policy should minimize idle capacity by attaching value to these economic elements by funding their employment in productive endeavor. A government that enjoys the sovereign right to issue currency should not restrict its currency’s use to the amount of foreign currency it receives. This restriction forfeits much of the fiscal power resident in the federal government. This has nothing but mean consequence for the great number of ordinary people, especially the unemployed.

 

Forever tying the level of naira to dollar revenue intake means our economic decision makers have turned exchange rate management into the nation’s primary macroeconomic goal. This is tantamount to giving food to the shadow yet leaving the actual man unfed. A sustainable exchange rate is a function of our economic strength not vice versa. A mechanistic pursuit of a high exchange rate as the chief policy objective is to love the image on the map more than the actual nation the map represents. The exchange rate is but a factor that helps measure economic strength; it can also be a tool used in building that strength. But, it is not that strength.

 

The overriding economic objective is to produce sufficient economic growth and development that allocate equitable shares of income and wealth among the nation’s economic constituencies. If we achieve the target of this aim, exchange rate stability will follow suit. Should we labor otherwise by giving primacy to exchange rate, we shall achieve neither exchange rate stability nor adequate economic growth.

 

 

 

 

Bank versus Government Creation of Money

 

The real issue is not how much naira is issued but how the money is used. To the extent the extra naira pays for economic activity that has a real value equal to or exceeding one naira, inflation will not be problematic. Real costs within the economy will not rise as long as any additional naira are employed for things of productive value equal to the naira. Inflation jumps when the funds are spent on things of lesser productive value.

 

This idea is not revolutionary. You see it in operation everyday but don’t acknowledge it. When told banks make loans based on deposits they hold, you have been told a myth. Government has given banks a charter to issue money. When, Nigerian banks issue loans, they don’t check their vaults for naira. Upon concluding the borrower is sound enough to repay the loan, the bank creates money with the touch of a computer keystroke. The funds are created out of thin air. In most developed economies, the vast majority of money is created in this fashion. Conservatives never complain about this process. They don’t complain because this private-sector mechanism predominately advantages the financial and economic elites.

 

Government using its currency issuance power to pay wages on infrastructural projects or to feed the hungry is done by the same mechanism. The mechanism is no different than how banks create money except that bank money creation is via loans. Thus, it is inherently associated with a new private sector debt. Government deficit spending is not necessarily tied to a debt. Consequently, such deficit spending may be less inflationary than private bank money creation because private bank money compels the payment of interest on the loan. Because of the interest on the loan, the real value of bank money is less than the real value of the equal sum of government deficit spending.

 

While the mechanisms of creating money by government and by private banks are similar, the conservative elite react differently to each. They hate government expenditure but extol private bank money creation. The different reactions cannot be attributed to the mere fact of money creation because creation of “money from thin air” occurs in both instances. The conservative objection is embedded in the discomfort that government may use the funds for reforms and projects that might help the average person and lessen elite control over the political economy. They fear the money might be used to reduce poverty and joblessness while spurring growth. Government deficit spending to help the poor and working class can amend the political economy in a progressive way inimical to elite interests. As such, their true opposition to government deficit spending is more a consideration of political power than objective economic principles.

 

In the end, government deficit spending has been the most reliable method to lift a nation from economic downturn or to divert that downturn. We must divorce ourselves from the myth that federal government deficit spending is wrong. For a state government or a private household, deficit spending incurs debt. High debt is impending disaster. However, the federal government occupies a different policy stratum due to its ability to issue currency. Deficit spending does not mean debt. All it necessarily means is that the government is giving the people more of what only government has the sovereign ability to create than it is taking from the people. That the people do not have capacity to issue money, the net flow of money from government to them not only seems just it makes economic common sense.

 

Nigeria’s level of unemployment and idle capacity is synonymous with what other countries would lament as an acute depression. We have lived in this dire condition so long that we now consider it normal; in reality, we suffer from a chronic, structural depression. As with the fiscal expansion needed to pull nations out of the Great Depression, Nigeria must engage in similar fiscal expansion to thwart the impending downspin caused by faltering oil prices. If we take the path of austerity, the contraction may intensify to the point where the downward momentum plunges us into a recession otherwise avoidable if only wiser policy had been known by those entrusted to have known.

 

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