You simply cannot make this up. I found a section of this priceless commentary from the Reserve Bank of Zimbabwe via Marc Faber’s latest newsletter (hat tip reader Dean), and had to verify it. The original provides an even richer mine of material.
From the Reserve Bank of Zimbabwe (boldface theirs):
As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests.
That is precisely the path that we began over 4 years ago in pursuit of our own national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification and demonization we have endured from across the political divide.
Yet there are telling examples of the path we have…For instance, when the USA economy was recently confronted by the devastating effects of Hurricanes Katrina and Rita, as well as the Iraq war, their Central Bank stepped in and injected life-boat schemes in the form of billions of dollars that were printed and pumped into the American economy.
Yves here. The authorities here would counter that the Katrina-related stimulus was appropriate in light of the macro shock, while Zimbabwe has taken a good construct beyond the breaking point. Billions, after all, are not a big deal in a $14 trillion economy. A difference in degree is a difference in kind.
Back to the Reserve Bank:
….the USA economy confronted a severe mortgage crisis… The USA Central Bank again responded by injecting over US$160 billion between December, 2007 and March, 2008…. leading central banks in the global economy are bailing out troubled economic sectors to achieve macroeconomic and financial stability….the Bank of England… providing a £50 billion lifeline to the UK’s banking sector.
Here in Zimbabwe we had our near-bank failures a few years ago and we responded by providing the affected Banks with the Troubled Bank Fund (TBF) for which we were heavily criticized even by some multi-lateral institutions who today are silent when the Central Banks of UK and USA are going the same way and doing the same thing under very similar circumstances thereby continuing the unfortunate hypocrisy that what’s good for goose is not good for the gander….
As Monetary Authorities, we commend those of our peers, the world over, who have now seen the light on the need for the adoption of flexible and practical interventions and support to key sectors of the economy when faced with unusual circumstances.
The operating assumption behind US policy now is seeing the US situation as parallel to that of the US in the Depression, and taking the view, based on the fact that the US seemed to finally shake off the slump with the demands of wartime production and the unprecedented budget deficits that accompanied them. But there were considerable worries in 1946 that the US would fall back into Depression. The conventional view is that pent-up demand carried the US through, after a sharp but very short downturn in 1946.
However, would this strategy have worked in a peacetime setting? The US also emerged from its slump to a world with a tremendous amount of industrial production destroyed by the war. Thus, the US, whose problem in the late 1920s (which didn’t look like a problem at the time) was that it was a huge exporter, to the point where it sucked up so much gold as to be destabilizing to the financial system, could with 50% of world GDP, revert to its preferred old role with less damaging side effects. Had the rest of the world gone into wartime levels of stimulus along with the US, without the loss of productive capacity, would there ever have been an end of the beggar-thy-neighbor trade policies of the 1930s? International trade didn’t just fall, “collapsed” is not an uncommon characterization of the degree of contraction.
I am not saying my line of thinking is right, but the US remedy worked (or appeared to work) in a particular set of circumstances very different from the ones on offer (we hope, at least, I don’t think anyone outside the Rapture crowd would advocate another world war as a remedy to the slowdown).
Similarly, as we have said before, the US was a world-dominating exporter, as China is now, and had the biggest gold reserves, as China now had the largest FX reserves. Thus it is China that needs to undergo a huge-scale stimulus program to make up for the loss of demand from the US. Keynes, in the 1930s, advocated that the US make up for the demand loss rather than expecting the US’s overindebted European trade partners to continue overconsuming. (Note that China’s recently announced $500 billion plus stimulus package is less than meets the eye. Analysts have estimated that 1/3, some say as little as 1/6, is spending not already planned, and most of that occurs in the second year of this two-year program).
Yet what is being advocated as a Keynesian remedy is in fact the opposite of what Keynes called for in his day. Keynes’ prescription then would lead to a global rebalancing, with the US depending more on internally generated demand and less on its foreign partners (who were defaulting on their government debt). But if it were successfully deployed in the US now, it wold lead to a continuation, of our excessive consumption and China’s underdevelopment of its internal demand.
So why don’t we lean on China harder? A few quick thoughts:
1. China does not take well to being told what to do, particularly when we their biggest borrower is looking a tad wobbly and not a particularly good model of fiscal and economic management
2. China becoming a consumer-led economy will not come about via a big stimulus program, no matter how much money is thrown at it. This is a twenty-year transformation.
First, China’s leaders are afraid of giving up its wage differential advantage, Workers would need to be paid a lot more to be able to consume more (recall this was Henry Ford’s great insight” by paying factor workers well, he was creating buyers for his products). I don’t have a ready citation, but the wage share of China’s economic expansion is very low.
Second, China needs much more extensive social safety nets for workers to be willing to save less. With a one-child policy, no health care insurance, no unemployment or welfare, savings are the old good fallback.
Third, because of the great wage differential, China’s present manufacturing capacity in many cases cannot easily be repurposed to make goods that would appeal to domestic workers (even with China’s low by Western standards capital intensity of manufacturing, production today in general is more specialized than in the 1930s. Think of the long supply chains, for instance).
So having the US engage in stimulus instead is arguably a best-available option, but it looks perilously like a desperate attempt to create status quo ante, but with more debt and credit risk sitting on government balance sheets.
And those who would dispute the claims of Dr. G. Gono, chairman of the Zimbabwe Reserve Banks’ claims of comradeship can also point to this factoid:
….the monetary base… increased by 72 percent from September 10 to November 19 of this year. We should also note that the money supply – whether measured by M1 or by MZM – has increased by less than 1 percent.
One can characterize this pattern as either that the Fed has done the right thing by combatting deleveraging or that the Fed is pushing on a string. But either way, the assumption is that all of the central bank’s efforts to pump prime will finally take hold and we’ll get some good old fashioned reflation, and the Fed can mop up the excess liquidity. But will it be able to move fast enough? How bad might the overshoot be? The Fed is presumably going to be reluctant to put the brakes on too quickly for fear of putting the economy back into a contraction, so the worry about inflation when the upswing kicks in, particularly with more countries on the stimulus program than in the 1930s, is not nuts.
Dr. Gono is glad to have company. We can only hope that his comparison is erroneous.