Reconsider saving in fiat.
By Reuben Machinga
“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” Milton Friedman’s words kept ringing in my head over the last few days. While discussing over on our Telegram and Bitcointalk platforms, I touched on the difference that arises between the objectives of central bank policy (and practice) and one’s personal financial objectives.
Allow me to expand a bit more on that point and illustrate it with examples.
Zimbabwe: Land Reform And The RBZ’s Quasi-Fiscal Operations
Allow a heavily abridged version of Zimbabwean history. A deep inequity beset land ownership patterns in Zimbabwe. For that, we can thank colonialism. By the year 2000, the government of the day, under the stewardship of the seemingly internationally loathed former president of the country, Robert Mugabe, decided on a ‘fast-track’ land reform. It was unconventional, and it upended the traditional system of land ownership, and, as a result, the traditional manner in which agriculture was financed.
Title deeds were gone and in their stead came offer letters and 99-year leases. It takes no stretch of the imagination to see how these new tenancy instruments would not be acceptable by Zimbabwe’s commercial banks as security. The new beneficiaries of the land reform programme could not get access to financing from the commercial banks. With no money coming in, compounded by the disruption of value chains, agricultural output in the country faltered. The government had trouble on its hands and the solution seemed to come from the Reserve Bank of Zimbabwe.
The logic seems pretty simple and straightforward. A no-brainer, really. If commercial banks refused to lend to these new farmers and the Reserve Bank of Zimbabwe (RBZ) was the lender of last resort, why not have the bank finance the farmers directly? Although it looked so simple, the results were disastrous. I admit it may not be fair to pass judgment now when I have the benefit of hindsight, but, the move was ill-advised. That was for two reasons. Firstly, output did not increase in step with the growth in the stock of money. Secondly, the bulk of these loans were never paid back.
With that experiment proving to be a harebrained scheme, surely it would end there. Well, no, it didn’t. Even conventional economics textbooks warm about the dangers of having politicians too close to the money printing press. During this time, they, the politicians, were in full control… and the press was never shut off. Election cycles and an eagerness to force the economy to be functional saw the RBZ move from being a bank for the banks to be a direct participant in the retail money markets. For the average person, though, financial misery was what came of it.
Pensions, savings, education funds and all other ‘assets’ like them all went up in smoke. All of them were paper assets denominated in a Zimbabwe dollar that was rapidly losing value because of the RBZ’s wild expansionary monetary policy. We shouldn’t express such a rapid decline in people’s financial wellbeing in ‘academese’. Imagine the value you had set aside over your entire working life come to naught. That the country did not plunge into violent chaos is a miracle in the truest sense of the word. It could have only been a force outside our comprehension that quelled the anger and frustration brewing in the hearts of many Zimbabweans.
The farmers didn’t benefit much either. Hyperinflation set in and made unreasonable the work of planting seed into the ground and working for months towards a bountiful harvest. The costs of production grew by multiples before any income could be expected from the produce.
Before we are seduced into thinking these are merely the works of ‘dark’ Africa, let’s set our sights on the ‘advanced’ west
The 2008 Global Financial Crisis And Quantitative Easing
Greed. That’s what is usually blamed for the global meltdown of 2008. The story we are often told is that some Americans, perhaps many, borrowed money to buy homes they could not afford. Because of the incentives standing before mortgage brokers at the time, they sold mortgages to people who they knew could not afford them. The brokers earned a commission on each sale, of course. The party went on for some time and some got rich while others lived in the illusion of plenty.
Much like in a game of musical chairs, the music was going to stop and someone was bound to lose out. A great many people were set to lose as it turned out. It started out, we’re told, with people failing to keep up with their mortgage payments. When that happened, the magnitude of the problem was revealed to us all.
Masters of the universe in that far-flung realm of finance, a realm seemingly beyond our everyday comprehension, had bundled these mortgages up and sold them to other companies. And they, in turn, bundled them up again and sold them on to yet more companies. This went right up to retail banks that are household names in the western world. They held these ‘toxic’ debts. Creative accounting gymnastics also allowed them to shelve some of these holdings in so-called Special Purpose Vehicles. SPVs allowed financial services firms to have assets and liabilities that were off their own balance sheets.
When the flow from the subprime mortgages, those home loans taken out by people who could barely afford them, slowed down into a trickle and then effectively stopped, panic gripped capital markets the world over.
Banks could not trust other banks and the interbank money market shrank as a result. After all, who knew just how much trouble the banks were in. Balance sheets couldn’t be trusted with the creative accounting and business structuring at play. It came as no surprise that central banks around the world felt the need to come to the rescue.
Their solution was quantitative easing. Effectively, their solution was to create loads of money and dump it onto the banks in the hope that they would lend to the productive sectors of the economy. It goes without saying that growth had slowed down around many parts of the world.
This ‘quantitative easing’ saw interests tumble to levels so low that it no longer made sense to save. Arguably, this is still the reality in many parts of the western world. Real interest rates (nominal interest rate — inflation) are close to zero, if not negative. This leads on to why you should care about all this.
Why should you care?
Saving, after all, is an exercise whose chief aim is the storage of value over time. As we have seen dramatically in the post-2000 Zimbabwean era and also, albeit in a comparatively muted way, in the post-2008 western world scenario, saving in fiat currency or some other derivative of it makes saving an exercise in futility.
You can only win if real interest rates are positive by a significant enough margin. High real interest rates are sometimes, nay, at many times counter to the policy objectives of the central banks of the world. Even without bringing malevolence into account, ordinary monetary policy in recent years has made unworkable any attempt to save and store value in fiat currency (or any derivative of it). You have to look to something with a much longer, and proven, history of storing value.
