From Hyperinflation to Deflation

I have just lived in a hyper-inflationary situation for a few years. A a matter of fact, Zimbabwe has probably been the country with the highest rate of inflation in History. The actual rate is unimportant, when a loaf of bread costs 30 trillion dollars, the problem for the ordinary citizen lies elsewhere. 

When one thinks that it was less than six months ago that the Reserve Bank cut 10, that´s right, ten zeroes off the currency and for a few brief days, the dollar US hovered around 4,500, then things start getting funny. 

Again, not even 2 years ago, the Reserve Bank cut another 3 zeroes off the currency of the time. That is a total of 13 zeroes off, and still a loaf of bread is 30 trillion Zimbabwean dollars.

But the real problem is that the salary of a Teacher, or a Nurse, is also 30 trillion. That is to say their monthly salary doesn´t cover a single loaf of bread. The ZANU-PF solution: you simply make bread unavailable. You can´t find bread in Zimbabwe today.

After that experience, I come back home to Europe and find myself in a deflationary situation. All in a matter of hours! Prices of nearly all goods and services are falling quite sharply, and people are still not buying. Most European governments´ solution: spend their way out of recession and deflation. Wrong choice again! 

As one of my favorite blog writers reminded us all yesterday, Margaret Thatcher once said:  “The problem with Socialism is that you eventually run out of other people’s money”

Today I have to think that something is really very wrong with this world we live in. 

Shameless boasting!

 

Please allow me to boast shamelessly today. If you read yesterday´s post, before President Obama became the 44^th in our history, I sort of hinted that the Euro was a mistake, and certainly not such a good idea if we place our hopes in it.

 

Now, today I wake up to find a column by Paul Krugman, (yes that one!) saying the same thing about Spain, very close to me. (http://krugman.blogs.nytimes.com/) .

 

Please understand this is the first time ever, that I have actually thought and written about something which agrees with what an Economist like Mr. Krugman believes.

 

What he says, and I only hinted, is that economies of the  likes of Spain, Ireland, Greece and Italy need, desperately, to become more competitive. Since the Euro zone discards devaluation, the only other solution is to drastically reduce salaries. So, we will have to face that indebtness is only part of our predicament in Europe. Competitiveness is a lot more crucial in these times.

 

That is what I called yesterday in my post, having to pay for the party we have had for these past years when we all thought we were rich people, with lots of money to spend.

 

The problem is that in a Socialist environment like in most of Europe, once you have obtained something by whatever means ( at the beginning it was through revolution now it is called “ social benefits”) you can never, by principle, go back. They become “ Human Rights” with ease and are no longer open for debate. At least that is the principle that European Socialists uphold. That is why they have this obsession with spending their way out of recession, thus worsening the problem they want to solve in the medium run.

 

However they don’t really have to care that much, because the investment in infrastructure they so loudly proclaim as the solution to most of our current problems, is bound to create a few jobs for workers coming from the housing sector and low level manufacturing sectors. But those are going to be more prone to vote for the Left anyway, whereas in the services sectors, at the very least hiring’s are coming to are halt, and layoffs, though still relatively limited, may grow in the next few months. But they happen to have fewer voters amongst these citizens anyway.

 

Who knows, if in Europe we keep down this road for long enough through this crisis and recession it may well be that Socialism will disappear once again from the political map. For a couple of decades at least. This is what happened after the crisis of the 70s in the UK with the coming to power of Thatcher and in the US with Ronald Reagan. Sort of a vaccination.

 

Just to add a little bit of spice to the whole issue of flexibility of the different developed economies, in his recent analysis, Andrew Garthwaite, Global Strategist at Credit Suisse, ranks 44 countries regarding their flexibility to adjust to cost reduction. It is no surprise to see that the most flexible country and therefore the one with the highest probability to regain its competitive status is the USA. Perhaps it is no surprise either to see that the last, number 44, is Spain. It ranks as the least flexible economy regarding labor costs. Therefore, it has the least chance to be able to regain competitiveness in a limited period of time, if ever.

 

There are worse examples and the IMF is all over them in the European Union. Take Hungary and Latvia for example.

 

But also take the differences between President Obama´s constant praise of his country and his people and the capacity we Americans have to work harder and come out of the crisis stronger than ever, and the small talk, yes small talk of some leaders who refuse to go to their Parliaments and prefer talk shows and You Tube videos to ask their countrymen to “ shop more intensely in this traditional sales month!!!”

 

In any case, I digress. The main purpose of this post was to share my pride at having got it “right” this time and to go along with  Krugman, an American Liberal, from someone like me who certainly is not one of those.

 

The fact is we are, at some time, going to have to tackle the competitiveness problem head-on. And without the possibility of devaluation, and politicians not wanting to accept that salaries and standard of living is going to have to come down substantially ( the IMF suggest a 5% cut in the public sectors of a few European countries), the only other way economists can think off is via exports.

 

But is this  a sensible thing to propose in an environment where manufacturing has being decreasing for decades, and these countries owe most of their GDP to the housing sector and services? I somehow don’t think so. 

Our Leaders and the crisis

There are many differences between Europe and the US as far as perceptions go. Part of the reason I am writing this blog is to try and highlight some of these differences so that we can hopefully understand each other better.

The US now is up to 7% unemployment rate. This rate skyrockets in some European countries. In Spain, for instance, it is nearly 14% and growing at an alarming rate. That is double the US rate, but in Spain people seem less concerned about this.

They seem to believe that a social “ cushion” still exists in Europe. That family and its ability to help out in a crisis period is going to be able to cope as was the case 20 years ago. I think they are wrong. European society is now much less vertebrated than in the past. A lot less than some of us would have liked to see in our lifetime. This is the result of political choices, mistakes one could argue, of so many years of socialism.

People also tend to forget that public resources are limited and that the money people on the dole receive every month they are out of a job has to be paid by those of us who still are employed, and by our children.

Another main concern is the capacity of our leaders to steer us out of this crisis. Present European leaders are of the “ optimist” category. They are all very capable as long as we have favorable winds. They cannot acknowledge the gravity of the situation. They have to speak about the recovery, which they label as “ speedy”. 

I believe we lack “ pessimists” in government in most countries. Most European leaders are no Churchills. And a Churchill is probably what we most need now in Europe. Someone has to tell us that “ blood, sweat and tears” is what we can expect in the near future. And that the recession is going to be lengthy rather than speedy. In other words, we need to be told the truth from the people whose job it is to know the truth.

I am in no position to judge President-Elect Obama. I do not know if he is a “Roosevelt” or not. But I will be following closely, because, in Europe, we also need his leadership as much as we need our own leaders to stand up and fight for us.