The Financial Times tells us that sales of government debt will reach $2 trillion next year – led by the United States and Britain, each borrowing about 10% of GDP. For France, the borrowing will reach 8.6% of GDP. Yet, this week, the brightest star in the investment firmament burned brighter still: U.S. Treasury bond prices rose to levels never before seen. The 10-year T-Note, for example, yielded all of 2.67% (yields fall as prices rise).
It was as if the laws of nature had been suspended. The cost of the world’s bailout efforts are said to be beyond $10 trillion already. Yet, the more bonds governments sell to finance the rescue, the more the demand for them grows. Remarkably, the further in debt government goes, the more people want to lend it money. Maybe, if the feds get away with this, gravity will be the next to go.
Central bankers, as everyone now knows, are rascals and scalawags. Gideon Gono is no exception. But there is something heroically imbecilic about the man. While most economists hedge and weasel, Mr. Gono goes boldly, recklessly forward – where no central banker has dared to go, at least not since the worst days of the Weimar Republic. Mr. Gono stands tall…a colossus of error…an Olympus of bunglement.
It is easy to criticize the chief of Zimbabwe’s national bank. In fact, it is hard not to criticize him. Keynes warned that “there is a lot of ruin” in a nation. Mr. Gono’s contribution to economics is to show how much ruin there is. That…and proving that the laws of supply and demand still apply to money.
The latest news tells us what he hath wrought and it sounds like Hell: the trash piles up in Harare and the water system no longer works. Vendors are selling bottles of water for $25 US. Cholera has broken out…and Anthrax too. Shops are empty. People are hungry. Nothing works. This week, even the forces of law and order are on the rampage, breaking windows…looting what little remains in the shops. The soldiers and police haven’t been paid, at least, not with real money.
Between August 2007 and June 2008, the Zimbabwean money supply increased 20 million times. Naturally, this led to the kind of spectacular increases in consumer prices that modern economists had only seen on newsreels. Consumer price inflation was clocked at 2 million percent six months ago. Now, it is said to have sped up to 230 million percent.
Of course, Mr. Gono rolled out all the usual inflation fighting measures – all that is, except for the one that works. Prices have been controlled. Mr. Gono personally went around, found shop owners who have illegally raised prices, and had them arrested. Bank withdrawals have been limited to 500,000 Zimbabwe dollars per day. If you wanted to buy 2 kg of sugar, for example, you’d have to stand in line for four days at an automated teller. But at present rates, you could stand in line at the automatic tellers every day for eternity and never get enough money to buy a drink of water.
Last weekend was Gideon Gono’s 49th birthday. We salute him. He may be a moron; but at least he’s a useful one. Better than another bad theory, he has provided a bad example. In an age when central bankers all over the world are trying to avoid a decline in the cost of living, Mr. Gono has proven that there are worse things.
But despite Gono himself, Gonoism seems to be gaining admirers in the rest of the world; because the alternatives don’t seem to work. Keynesianism, for example. The Keynesians say that when people stop squandering their money, the feds have to step in and squander it for them. Right now, practically every government in the world is promising huge new spending programs. Deficits be damned! In the heat of the emergency, Europe waives aside the Maastricht limits and America prepares its first trillion-dollar deficit in 2009. By 2010, America’s deficit could easily reach $2 trillion.
But will “Keynes on steroids,” as one journalist put it, work? There’s no evidence of it in the record. America tried it in the ’30s. Japan tried it in the ’90s. In neither case were the results favorable.
Milton Friedman saw the problem with Keynesianism – it led to rising prices…and then stagflation. He pointed to the lever marked “monetary policy.” Give that a pull, he said; just make sure the economy has enough money, everything else will take care of itself. Maggie Thatcher and Ronald Reagan both pulled on the monetary policy lever. And in the recession of 2001-2002, Alan Greenspan yanked it so hard the handle practically broke off. Milton Friedman was still alive at the time and actually approved of Greenspan’s handiwork, saying that he had ‘spared the economy a worse recession,’ or words to that effect.
But now we face an even worse recession. And central bankers are running out of ammunition to fight it. The U.S. Fed’s key rate is only 100 basis points from zero. His resources are “obviously limited,” said Bernanke, in a speech in Austin, Texas. But then, while the Fed can’t push interest rates below zero, “the second arrow in the Federal Reserve’s quiver – the provision of liquidity – remains effective,” he said. One option is for the Fed to buy “longer-term Treasury or agency securities on the open market in substantial quantities,” Bernanke said.
Gonoism, in other words.
Markets and Money