Friday 8 December 2017

Temra: The future of fiat money in Zimbabwe

Temra: The future of fiat money in Zimbabwe: The world has known fiat currency as the accepted medium of exchange since the 70s when multilateral financial institutions and governm...

The future of fiat money in Zimbabwe





The world has known fiat currency as the accepted medium of exchange since the 70s when multilateral financial institutions and governments abandoned the gold standard. Whereas a gold standard system matched the quantity of currency in circulation to gold reserves held at a central bank, with a fiat currency system, it is only the central bank officials who decide the quantity of currency in circulation.
So the value of fiat money is really an interaction of supply and demand for currency in circulation, there is no link to gold or any other valuable mineral stock. Indeed, governments were sold to this fiat currency idea because it allows them to print money with value well beyond the country’s real economic means. Of course this system is subject to abuse and that’s why some want to fiat currency to be abandoned. Others want the central banks’ monopoly of issuing currency scrapped.
Former controversial US congressman, Ron Paul has now made it his career choice to convince the United States government to abandon the fiat currency system although he gets rebuffed most of the time. Ron Paul believes that political meddling and the secrecy of the US Federal Reserve makes the institution unaccountable and unsuitable for the economy. This lack of accountability results in the uncontrolled money creation, corporate bailouts and quantitative easing policies, all of which cause inflation to spiral out of control. Ron Paul believes as consequence of this, the collapse of US fiat currency is only a matter of time.
Thousands of kilometers away, an almost similar debate has been ongoing in Zimbabwe ever since the country dollarized in 2009, following the collapse of the Zimdollar. Many Zimbabweans now understand that printing money without a corresponding increase in production, (as what happened with bond notes) spells doom for the economy. Therefore, when the Reserve Bank of Zimbabwe (RBZ) desperately tried to convince masses in 2016, that bond notes would solve the cash shortages and the liquidity crisis, this was rejected. Instead, pressure groups resisted the introduction of the pseudo-currency by staging sometimes violent demonstrations.  The RBZ would eventually have its way and the bond notes became Zimbabwe’s latest currency.

Bond note collapse


Sadly less than a year later, the bond note currency project had ruptured, the pseudo currency failed precisely because in that period, national production did not increase, neither did the country’s balance of trade deficit disappear.  In fact, some economic indicators show that the economic situation worsened when bond notes came into play. For instance, prior to the introduction of bond notes, official inflation figures were negative. Since then, inflation accelerated to levels above zero while some experts believe the economy has already returned to hyper-inflation levels of three digit figures!
Meanwhile, a cross section of Zimbabwean economy experts now believe an adoption of the South African rand will prove to be a short term panacea to liquidity problems and cash shortages. Strangely though, some of these experts believe the US dollar is no longer a ‘sustainable’ currency even as the greenback remains a preferred currency of many countries.
The reality however is this, Zimbabweans will accept any other stable currency other than what the RBZ issues because its officials will have zero influence over that currency. In other words, the RBZ and its fiat currencies are unwanted by Zimbabweans, at least for now. Unlike the US which is yet to experience a modern day currency collapse, Zimbabwe experienced what Ron Paul fears hence the lack of enthusiasm for another locally issued currency. Amazingly though, many Zimbabweans still have faith in fiat currencies that are issued by stable economies like United States and South Africa. Only a few citizens have questioned or doubted the premise on which fiat currencies are founded.
Ironically, one of the few in Zimbabwe to question the long term viability of fiat currencies, was former central bank governor, Gideon Gono. In 2011, he suggested that the country could use its untapped mineral resources to back its own currency, a departure from fiat currency. He argued that the US Federal Reserve was engaging in the printing of money (quantitative easing) similar to what the RBZ had done during his reign and that this was not sustainable. The man knew the consequences having presided over the cataclysmic collapse of the Zimdollar between 2004 and 2008 when he over-printed money.
Unfortunately, his idea had a few takers from the policymakers side hence the ensuing debate remained low key before dying a natural death. In any case, Gono suggested using unknown quantities of yet to be extracted minerals as the currency guarantor. This is an impractical solution because no one has been able to quantify the true value of Zimbabwe’s unextracted minerals. Besides, Gono’s proposition ignored costs of exploration, extracting and processing of the minerals.
The bottom line is Gono knew the limitations of fiat currency but he did not offer viable alternatives.

Bitcoins


Globally, there are people who share Gono’s concerns about the longevity of fiat currency. As a consequence, a number of innovative alternatives to fiat currency are emerging. The most innovative solution so far has to be the Bitcoins that were launched in 2009 as the world's first decentralized, private digital currency. Bitcoin currency has no physical denominations, it only exists inside of an interlinked computer network system.
Bitcoins are generated or ‘mined’ through a sequence of complex mathematical formulas run through computers. The anonymous creator of Bitcoin set a cap on total volume. Once that number hits 21 million, no more Bitcoins can be generated. This is an important selling point for Bitcoins, there is no over printing (or mining) which dilutes real value something that happens quite often with fiat currency.
At the moment, the value of Bitcoins has surged leading some investors to conclude that Bitcoins are a ‘bubble’ that is about to burst and not reliable store of value. It remains to be seen if Bitcoins will weather the coming storm, but whatever happens, the reasons that gave rise to this cryptocurrency will remain. The same reasons are also giving rise to barter trading as people try to find lasting solutions to challenges inherent with fiat currencies.
Barter trade is emerging as another alternative to transacting in fiat currency. This may come as a surprise because problems associated with barter exchange gave birth to money as we know it today. However, the shortcomings of fiat money have forced some to go back to the drawing board so to speak, where it all began.
According to the International Reciprocal Trade Association (IRTA), governments such as China, France and Ireland have considered launching state-sponsored barter schemes. Bartercard, a bartering organisation for small and medium enterprises, has more than 35,000 members and many companies have exchange mechanisms in place. The IRTA says that 30% of business worldwide is done on a barter basis.
Clearly, the growth of Bitcoins, barter trade and other alternatives point to problems with fiat currencies that need to be addressed. In Zimbabwe, the RBZ insisted it would not print bond notes in excess of US$200 million as many feared. There is one problem with that assurance though, the process of currency printing is not open to public neither can the public audit the RBZ operations. This lack of transparency undermines public confidence in the currency and the government has to find ways of fixing this problem permanently. Without confidence a currency will not survive even if it is backed by gold.