Our Expansion Experiment
[This article originally appeared in Liberty Watch magazine.]
Financial pundits, led by CNBC's Larry Kudlow, were rooting for the Federal Reserve to "shock and awe" the market with a 50 basis point cut on the Federal Funds rate at the central bank's September meeting. Fed chair Ben Bernanke didn't disappoint, and investors recognized further dollar devaluation and sent gold, stock and commodities markets through the roof and the U.S. dollar to the basement.
The Fed has been creating money at a phenomenal clip all year with the M-3 (that government no longer reports, but economist John Williams does on Shadowstats.com) growing at a 14-percent rate, a 34-year high.
But since the meltdown of the sub-prime mortgage market, the Fed has really been shaking its moneymaker. In a Sept. 6 alert to his subscribers, Williams noted, "M2 now has risen by $111.1 billion for the last two weeks, rising at an annualized fortnight growth rate of 48.2 percent."
Even Countrywide Mortgage CEO Angelo Mozilo is panicked. While he has publicly urged the Fed to aggressively cut interest rates to help the housing industry, he has been aggressively cutting the number of shares of his company's stock that he owns, selling more than $200 million worth just since the first of this year.
Mozilo isn't going to miss any meals. Nor is Chairman Bernanke or the Wall Street fat cats the Fed is bailing out. The middle class and the poor will feel the pain. As Congressman (and Presidential candidate) Ron Paul asked Bernanke during hearings on Capitol Hill, "How is it morally justifiable to deliberately depreciate our currency?"
Bernanke's terse reply was, essentially, that the inflation rate is low, so don't worry yourself.
Meanwhile, on the other side of the globe, an ongoing monetary expansion experiment has completely decimated one of Africa's richest economies. The country of Zimbabwe was once known as the "bread basket of Africa," exporting wheat, tobacco and corn to the rest of the continent and beyond. Zimbabwe's farmland is the most fertile on the continent, and the country is also host to one of the seven natural wonders of the world, Victoria Falls. The country is not only rich in natural resources; the country's literacy rate is the highest in Africa at more than 90 percent.
Unfortunately, Marxist guerrilla leader Robert Mugabe's ZANU-PF party won the 1980 general election and Mugabe has controlled the government, the ballot box and the money printing press ever since. His disastrous economic policy of out-of-control money creation — inflation — has turned the country from breadbasket to basket case.
Although Mugabe's government says the inflation rate in Zimbabwe is 7,600 percent, others estimate it to be 25,000 percent, and the Associated Press reports that the International Monetary Fund believes that, by the end of the year, the inflation rate will be 100,000 percent.
One Zimbabwean businessman told the BBC: "I don't even know if I'll have a job at the end of the week, because there is so much uncertainty. There are so many companies closing down. It is quite interesting to see people going in banks with bags and sometimes even suitcases. You know that there are large amounts of money in there — which unfortunately are not going to buy much."
So while there is plenty of paper money floating around Zimbabwe, with many of the bank notes having plenty of zeros, the food shortage has now put family pets in harm's way. People can't afford to feed their animals, not to mention themselves, but most can't bring themselves to butcher and roast Fido for dinner, so animal shelters are full.
With the price of food soaring in Zimbabwe dollars, the Mugabe government thought it would solve the problem by ordering stores to cut prices. Of course, this exacerbated the food shortage, placing a premium on food scraps, and now aggressive rats are roaming beyond dumpsters for sustenance.
But, people do what they must to survive, and the black market is alive in Zimbabwe. Pet meat sells for more than 10 times the government's fixed price on the black market, according to the AP.
"Inflation is the fiscal complement of statism and arbitrary government," economist Ludwig von Mises wrote. "It is a cog in the complex of policies and institutions which gradually lead toward totalitarianism."
Although it appears for now the Bernanke Fed is way behind Mugabe's Reserve Bank of Zimbabwe in the inflation race, the man tracking the numbers at Shadowstats, believes "the onset of hyperinflation [in America] remains most likely at least several years in the future," an unappetizing prospect.