Bill Bonner: in Gono we trust
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Bill Bonner Feb 06, 2009
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Zero is a perfidious number. Nobody likes it; it is a line that leads nowhere and it has no substance in the middle of it. That is why it took the Arabs so long to come up with it. What is a zero? Is it something? Or nothing? If it is something, what is it? If it is nothing, how come there is a number for it?
Some remarkable news in the history of zeros appeared this week. Gideon Gono, head of the Reserve Bank of Zimbabwe, suddenly shifted from adding zeros to subtracting them. Once again, we are profoundly grateful to the nation of Zimbabwe and to its central banker. The latter has turned the former into a marvellous laboratory for bizarre monetary experiments.
The pile-up on the global financial highway has yielded its toe tags and broken mirrors. More than $30trn has been lost. Of course, the world’s monetary cops have been on the scene for about a year and a half – trying to get the traffic moving again. But just read the newspapers: instead of a recovery, every day brings more skid marks and fresh collisions.
A little bit of the old juice from the central bank will cure a typical recession. It is nothing more than a pause in the inventory cycle, allowing businesses to clear their shelves before they are restocked. But this is not an inventory-driven recession; this is a balance-sheet depression. The problem is not really an absence of credit, but an abundance of debt. Throughout most of the post-WWII period, private-sector debt in the US equalled about 80% of GDP. In the 1990s and this decade, debt rose to 140% of GDP. The difference is about $6trn. Until this debt is reduced, people will be reluctant to borrow or spend.
And it is not just the debt itself, but what the debt paid for, that must be eliminated. Homeowners have more house than they can afford. Retailers have more shops than customers. Auto lots swell with unsold cars. You can see excess capacity in the unemployment lines too. Suddenly, the world seems not to need so many sales clerks, or welders, or financial engineers. The US alone may have $1trn of excess output capacity and ten million people too many in the workforce.
Debt and excess capacity must be reckoned with, one way or another. They can be liquidated quickly – as they were in the panics of the 19th century – through bankruptcies and defaults. But liquidation would have to take place over the dead bodies of US Fed chief Ben Bernanke and Prime Minister Gordon Brown – just to name a couple. While that would be our preferred method, alas, it’s not going to happen.
Another way to eliminate debt and excess capacity is to work your way out of them. Unfortunately, that process takes a long time – especially with the feds keeping zombie firms alive and fighting the correction every step of the way. Japan has been working off its excess capacity for the last 19 years. Property prices in major Japanese cities began going down in 1991. They fell for the next 13 years, bottoming out in 2004, 87% below their peak.
US policymakers will not want to follow the Japanese example. Besides, they lack several things the Japanese had – such as patience, a favourable trade balance and a thick cushion of domestic savings. On the other hand, the Americans have one thing the Japanese did not have – America can pay its debts in a currency it alone controls. If it chooses, it can resort to a third way to get the traffic moving; it can inflate away the debt. “We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation,” wrote Bernanke. But with $7trn in excess, in debt and spare capacity, many economists wondered if this were true.
Now Gono has provided proof that Bernanke is right. Among Gono’s other monetary freaks, he produced the world’s first $1trn note – only a few weeks ago. Then, it had a value of about US$31. Now, it and about three US bucks will buy you a cup of coffee in Harare – if any coffee can be found. And on Wednesday, banks were supposed to begin distributing the new currency – in which all 12 zeros on the trillion-dollar note have been lopped off. Thus, within the space of 76 hours, Zimbabwe led the world in two opposite directions. On Monday, with prices rising at 231 million per cent per year, Zimbabwe was the world’s hyperinflation record holder. On Wednesday, it led the world in deflation – with prices falling 900,000,000% overnight.
The architect of this bold experiment was recently asked his views on the worldwide credit crash. He replied: “I sit back and see the world today crying over the recent credit crunch, becoming hysterical about something which has not even lasted for a year, and I have been living with it for ten years... I had to find myself printing money. I found myself doing extraordinary things that aren’t in the textbooks. Then the IMF asked the US to please print money. I began to see the whole world now in a mode of practising what they have been saying I should not.”
Gono added so many zeros to the national currency, he practically gave inflation a bad name. But now it is inflation that the world wants – desperately. And day by day, the glances over Gono’s shoulder become more curious – and more admiring. We will do “whatever it takes”, says new US Treasury Secretary Tim Geithner. Here come the zeros.
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