tag:theconversation.com,2011:/ca/topics/hyperinflation-17873/articlesHyperinflation – The Conversation2023-08-10T13:39:17Ztag:theconversation.com,2011:article/2098412023-08-10T13:39:17Z2023-08-10T13:39:17ZZimbabwe heads to the polls amid high inflation, a slumping currency and a cost of living crisis<figure><img src="https://images.theconversation.com/files/541697/original/file-20230808-17-q9ved7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Inflation continues to defy Zimbabwe central bank efforts </span> <span class="attribution"><span class="source">Getty images</span></span></figcaption></figure><p>Zimbabwe is facing a host of pressing challenges that voters dearly want the next president to address. Persistently high <a href="https://www.bloomberg.com/news/articles/2023-06-26/zimbabwe-inflation-back-at-three-digits-after-currency-crashes">inflation</a>, elevated <a href="https://www.bloomberg.com/news/articles/2023-07-28/zimbabwe-holds-key-rate-after-currency-s-world-beating-streak">interest rates</a>, and a slumping and volatile <a href="https://www.bloomberg.com/news/articles/2023-06-07/zimbabwe-stops-short-of-free-floating-currency-in-exchange-rate-battle">Zimbabwe dollar</a> have combined to fuel a cost of living crisis for households and battered business activity. </p>
<p>These will be among the key economic concerns weighing on Zimbabweans as they prepare to cast their votes at elections scheduled for late <a href="https://www.bloomberg.com/news/articles/2023-06-25/zimbabwe-leader-opens-election-bid-as-inflation-battle-continues">August</a>. President Emmerson Mnangagwa is campaigning to secure a second mandate that will extend his <a href="https://www.bloomberg.com/news/articles/2023-06-25/zimbabwe-leader-opens-election-bid-as-inflation-battle-continues">five-year term</a> in power. He will square off against <a href="https://www.bloomberg.com/news/articles/2023-06-25/zimbabwe-leader-opens-election-bid-as-inflation-battle-continues">10 presidential candidates</a>, including the opposition’s main candidate Nelson Chamisa.</p>
<p>Inflation remains sticky and jumped <a href="https://www.rbz.co.zw/">175.8</a>% in June from <a href="https://www.rbz.co.zw/">86.5</a>% a month ago. Part of the recent re-acceleration in inflation was triggered by the Zimbabwe dollar’s slide, which plunged <a href="https://www.bloomberg.com/news/articles/2023-06-26/zimbabwe-inflation-back-at-three-digits-after-currency-crashes">85%</a> in the two months through May and pushed up import costs. Although inflation <a href="https://www.rbz.co.zw/">edged lower</a> in July, it still remains significantly elevated.</p>
<p>The central bank responded by hiking interest rates to <a href="https://www.bloomberg.com/news/articles/2023-06-06/zimbabwe-liberalizes-foreign-exchange-market-as-it-hikes-rates">150</a>% from a previously elevated level of <a href="https://www.bloomberg.com/news/articles/2023-06-06/zimbabwe-liberalizes-foreign-exchange-market-as-it-hikes-rates">140</a>%. This move intensifies the pullback on business and consumer spending caused by currency weakening. Additionally, the high pace of price growth has outpaced nominal wage growth, leaving many people struggling to afford everyday essentials. Fewer jobs add to these concerns.</p>
<p>Stubbornly high inflation and its negative impact on the value of the Zimbabwe dollar are symptoms of much deeper problems rooted in decades of fiscal and central bank governance weaknesses. That’s why inflation has defied central bank efforts to rein it in with a series of aggressive rate hikes.</p>
<p>The next president will therefore need to push for reforms in governance to tackle deep underlying problems. Otherwise the country will remain locked in a seemingly endless battle to ward off the economic crisis that is being acutely felt by voters.</p>
<h2>Governance vulnerabilities</h2>
<p>Governance broadly refers to institutions used to exercise authority by the government. Long-running weaknesses in fiscal and central bank governance institutions have undermined the capacity of the government to effectively formulate and implement sound fiscal and monetary policies for many years.</p>
<p>Between 2005 and 2008 for example, the government pursued an expansionary fiscal policy. Public spending averaged <a href="https://www.imf.org/en/Publications/WEO/weo-database/2023/April">8%</a> of GDP. </p>
<p>However, because of weak budgetary processes, spending was less efficient especially in areas critical for supporting stronger growth such as education, health, and public infrastructure. This meant that the economy could not generate more government revenue. Average government revenue collected was only about <a href="https://www.imf.org/en/Publications/WEO/weo-database/2023/April">5%</a> of GDP over this period. The budget shortfalls were financed by printing money, which undermined the independence and credibility of the central bank. This impaired the central bank’s ability to fulfill its mandate, including supporting price stability.</p>
<p>The influx of printed cash in the economy fanned domestic demand but did nothing to spur the production of goods and services to meet it. Inflation spiked and drove the value of the currency lower, raising the cost of imported goods and thus amplifying inflation pressures. </p>
<p>This dynamic created a feedback loop in which rising inflation and a weakening currency reinforced each other. The result was hyperinflation. In 2008 inflation reached <a href="http://news.bbc.co.uk/2/hi/africa/7660569.stm">231 million</a> %, prompting the government to withdraw the weakening Zimbabwe dollar from circulation the following year and to replace it with the US dollar to combat hyperinflation.</p>
<p>In the years following the switch to the US dollar, inflation receded until 2019 when the Zimbabwe dollar was re-introduced. This was done without fixing vulnerabilities in fiscal and monetary governance that had eventually led to the demise of the <a href="https://www.bbc.com/news/business-45523636">Zimbabwe dollar</a> in 2009. </p>
<p>Because of these vulnerabilities, inflation skyrocketed to <a href="https://www.imf.org/en/Publications/WEO/weo-database/2023/April">255%</a> in 2019 – a 23-fold increase from a year earlier as money supply growth quickened from <a href="https://databank.worldbank.org/source/world-development-indicators">28% to 250%</a> amid a widening government budget deficit which topped <a href="https://www.imf.org/en/Publications/FM/Issues/2023/04/03/fiscal-monitor-april-2023">10%</a> of GDP in 2017. Since then, the central bank has not been able to get a sustained deceleration in inflation despite aggressive rate hikes. </p>
<p>And the negative feedback loop between high inflation and a collapsing local currency was on full display again following the plunge in the currency in recent months. This has made the US dollar more <a href="https://www.bloomberg.com/news/articles/2023-06-26/zimbabwe-inflation-back-at-three-digits-after-currency-crashes">attractive</a>, and it is used more widely to pay for everything from food, fuel, school fees, rent and other services. In February the central bank adopted a new inflation gauge that tracks prices in both Zimbabwean and US dollars to capture this reality.</p>
<p>The US dollar is also seen as a haven which has taken on greater importance as inflation remains stubbornly high. In many ways, the return of the Zimbabwe dollar evokes bad memories of the inflation crisis of 2008 which still loom large for many people.</p>
<h2>Weaknesses in governance breed corruption</h2>
<p>Weaknesses in governance also create opportunities for higher levels of government corruption, which can lead to public spending waste, inefficiencies and lower revenue collection. All worsen budget deficits and add to monetary financing pressures on a central bank lacking independence. </p>
<p>In 2022, <a href="https://www.transparency.org/en/cpi/2022/index/zwe">Transparency International</a> ranked Zimbabwe 157 out of 180 countries based on perceived levels of public sector corruption, where the lower the rank the higher the perceived corruption. The evidence also showed no significant progress in tackling corruption for more than a decade. Another 2022 survey by <a href="https://www.afrobarometer.org/online-data-analysis/">Afrobarometer</a> revealed that a staggering 87% of Zimbabweans believe corruption has increased or stayed the same.</p>
<h2>A path forward</h2>
<p>Zimbabwe’s economy is facing a confluence of challenges: inflation that won’t go away, higher interest rates and a sliding currency. The fallout has included a cost of living crisis, slowing business activity and fewer jobs. These problems are symptoms of deeply embedded structural weaknesses in the economy.</p>
<p>The following reforms are crucial for addressing these structural weaknesses:</p>
<ul>
<li><p>Fiscal governance reforms to strengthen the budgetary process. This will enhance revenue collection and increase the efficiency of government spending. These reforms should also aim to boost revenue collection by lowering pervasive informality in the economy.</p></li>
<li><p>Central bank governance reforms to promote autonomy of the bank’s operations, including monetary policy independence which is important for preserving price stability.</p></li>
</ul>
<p>In addition, good fiscal governance positively affects central bank governance by reducing the need for central bank financing, which allows a reduction in inflation.</p><img src="https://counter.theconversation.com/content/209841/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonathan Munemo is affiliated with the Council on Foreign Relations. He was appointed as an International Affairs
Fellow for Tenured International Relations Scholars for the 2023-24 academic year.</span></em></p>Without governance reforms, Zimbabwe will continue to face an economic crisis.Jonathan Munemo, Professor of Economics, Salisbury UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1793232022-03-16T20:55:20Z2022-03-16T20:55:20ZDebt repayment in roubles, a possible economic counterattack for Russia?<figure><img src="https://images.theconversation.com/files/452172/original/file-20220315-27-15gf38s.jpg?ixlib=rb-1.1.0&rect=0%2C8%2C1920%2C1069&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">At the heart of the economic war: the parity of the rouble.</span> <span class="attribution"><span class="source">Ulianapinto/Pixabay</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>The Russian response to Western sanctions took a rather original form on Monday 7 March: to draw up a <a href="https://www.euractiv.com/section/global-europe/news/russia-adopts-list-of-enemy-countries-to-which-it-will-pay-its-debts-in-rubles/">list of “hostile” countries</a> and to authorise Russian individuals and companies to repay their debts in roubles, despite the fact that the credit was contracted in another currency.</p>
<p>On this list, we find the countries of not only the European Union, the United States, the United Kingdom, Japan, but also Canada, Switzerland, Monaco and Korea.</p>
<p>The decision of the Kremlin seems in fact quite shrewd and aims to indirectly gain the support of foreign banks.</p>
<h2>Double punishment?</h2>
<p>Most of the <a href="https://www.reuters.com/markets/europe/how-financial-western-sanctions-might-target-russia-2022-01-19/">economic sanctions taken against Russia</a> are intended to financially isolate the country. The logic is simple: money is the backbone of the war. Without money, it seems extremely complicated for Russia to be able to continue its action in a sustained manner.</p>
<p>This strategy of undermining the Russian economy is partly working. On February 24, the day of the invasion, the euro/rouble parity rate was 95 (i.e., 1 euro was equivalent to 95 roubles). On Monday March 7, it had risen to 148.38. This means that a Russian who wanted to buy a product for 300 euros in France had to pay 28,423 rubles on February 24, and 44,366 rubles on March 7.</p>
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<p>The ability of Russians to trade at the international level is therefore greatly reduced. When we know that the Russians imported nearly <a href="https://www.tresor.economie.gouv.fr/Pays/RU/commerce-exterieur">240 billion dollars</a> in 2020 (about 197 billion euros), the bill will increase significantly.</p>
<p>One might think that this devaluation of the rouble would reduce Russia’s export costs to foreign countries, favouring Russian producers on the international scene. However, to counter this potential positive effect, most European countries have decided to <a href="https://www.washingtonpost.com/world/2022/03/02/boycotts-russia-invasion-ukraine/">boycott Russian exports</a>. For example, they refuse to issue export licenses for certain goods. As a result, the penalty is twofold: imports are decreasing, and exports are being blocked.</p>
<p>What are the traditional solutions to this currency depreciation for Russia? The exchange rate regime of the rouble against other currencies is a so-called floating regime, i.e. it is fixed by the laws of supply and demand on the market. To strengthen the rouble, it would be necessary to increase the demand for it, and thus to increase the number of international financial transactions in rouble… which is deliberately prevented by the sanctions that have been imposed.</p>
<p>What card is left in the hands of the Kremlin? The answer given is imaginative, to say the least: to allow the payment of Russian credits abroad in roubles.</p>
<h2>International banks in a bind</h2>
<p>In addition to the international trade players, people who have credits with foreign institutions are directly affected by the international sanctions. Let’s say you are Russian, you have borrowed 100,000 euros from a French bank, and you pay back 500 euros every month. As of February 24, this amounted to 47,530 roubles, while the same amount is 74,190 roubles as of March 7. The credit is becoming more and more complicated to repay.</p>
<p>So there is a risk of a massive increase in defaults, causing difficulties for foreign banks. This is precisely the leverage that Moscow intends to use. By allowing Russian debtors to pay for their foreign loans not in local currency but in roubles, the country’s authorities are delegating the maintenance and management of their currency from Russia’s central bank to foreign banks.</p>
<p>Let’s take our example from another point of view: you are a French bank, you hold in your assets 100,000 euros of debt issued by Russian clients, with a monthly repayment of 500 euros per month. As shown above, the repayment value of this loan between February 24 and March 7 is not the same amount in roubles, respectively 47,530 roubles and 74,190 roubles. </p>
<p>In itself, this may not seem problematic for the French bank, since in both cases it recovers the equivalent in value, namely 500 euros. However, the problem is not the value, but the currency. Once owning this amount, the bank has two options. It can decide to keep this money in rouble, but with the significant risk at the moment that it will devaluate again, and therefore that the reimbursements will not be worth 500 euros anymore. Alternatively, it can decide to go to the financial markets to exchange these roubles for euros.</p>
<p>But if everyone tries to convert their roubles at once, this will lead to an even sharper fall in the value of this currency and thus a direct devaluation of the value of the repayment. In both cases, the French bank risks a significant loss of value on its repayments.</p>
<p>The French bank therefore has every interest in ensuring that the rouble/euro parity does not lose more value than it already has. Thus, by taking this decision, Russia has ensured that international banks will seek to indirectly support the Russian economy, in order to avoid seeing their credit devalued.</p>
<p>Some might argue that another possibility for these foreign banks would be to simply refuse payment in roubles. However, this is extremely complicated from a legal point of view because the question arises as to which authority is competent to judge this case and whether the other party to the contract will recognise the legal decision issued, which is not a given. From an economic point of view, this also means increasing the probability of never being repaid should the conflict escalate…</p><img src="https://counter.theconversation.com/content/179323/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Les auteurs ne travaillent pas, ne conseillent pas, ne possèdent pas de parts, ne reçoivent pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'ont déclaré aucune autre affiliation que leur organisme de recherche.</span></em></p>The idea: to use the credit channel by making foreign banks bear the consequences of the devaluation of the Russian currency.Jérémie Bertrand, Professeur de finance, IÉSEG School of ManagementAurore Burietz, Professeur de Finance, LEM-CNRS 9221, IÉSEG School of ManagementLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1757912022-01-26T22:50:16Z2022-01-26T22:50:16ZFederal Reserve plans to raise interest rates ‘soon’ to fight inflation: What that means for consumers and the economy<figure><img src="https://images.theconversation.com/files/442823/original/file-20220126-17-12pu2mv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">All eyes are on Fed Chair Jerome Powell as the central bank prepares to raise rates for the first time in three years. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/OffTheCharts-MoneyPrinter/a6f1d62158b34b549e3c907ed60bddeb/photo?Query=federal%20reserve&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=8573&currentItemNo=17">Brendan Smialowski/Pool via AP</a></span></figcaption></figure><p><em>The Federal Reserve on Jan. 26, 2022, <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20220126a.htm">signaled plans to begin raising interest rates “soon”</a> – possibly in March – in a bid to tamp down inflation before it poses a serious risk to the U.S. economy. A separate report released the next day <a href="https://www.bloomberg.com/news/articles/2022-01-27/u-s-economic-growth-quickened-last-quarter-with-inventory-boost?srnd=premium&sref=Hjm5biAW">showed the economy grew 6.9% in the fourth quarter of 2021</a>. An interest rate hike would be the first time the central bank has increased its benchmark lending rate in over three years.</em></p>
<p><em>Lifting the borrowing costs consumers and businesses pay for loans has the effect of slowing economic activity, which in turn could curb inflation. But there are also concerns that it could put on the brakes too quickly. We asked <a href="https://scholar.google.com/citations?user=JfUEmSUAAAAJ&hl=en&oi=ao">Alexander Kurov</a>, a finance professor at West Virginia University, and <a href="https://scholar.google.com/citations?user=dnCoKIUAAAAJ&hl=en&oi=ao">Marketa Wolfe</a>, an economist at Skidmore College, to explain what the Fed is doing and what it means for you.</em> </p>
<h2>1. Why is the Fed raising interest rates?</h2>
<p>Short-term interest rates in the U.S. <a href="https://fred.stlouisfed.org/series/FEDFUNDS">are now essentially zero</a>.</p>
<p>The Fed quickly cut rates to zero at the beginning of the COVID-19 crisis in March 2020 in an attempt to soften the blow of the <a href="https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions">sharp recession that began that month</a> as the U.S. went into lockdown. As a reminder of how bad things were back then, <a href="https://fred.stlouisfed.org/series/ICSA">over 40 million workers</a> – a quarter of the American workforce – filed for unemployment in the first few months of the pandemic, a staggering number with no precedent in the job market.</p>
<p>Although the recession was short-lived – lasting only two months – and the <a href="https://www.cnn.com/business/us-economic-recovery-coronavirus">economy has mostly recovered</a>, the Fed has kept rates at rock bottom because <a href="https://www.vox.com/the-highlight/22665191/covid-economy-poverty-unemployment">many workers and businesses still need support</a> as the pandemic continues to rage. </p>
<p>The big problem for the Fed now is that U.S. consumer prices have surged. For 10 months in a row, inflation has been above the <a href="https://www.federalreserve.gov/faqs/economy_14400.htm">Fed’s 2% target</a> and <a href="https://www.bls.gov/news.release/cpi.nr0.htm">reached an annual pace of about 7% in December</a>. This is the <a href="https://fred.stlouisfed.org/graph/?g=8dGq">highest rate of inflation recorded in the U.S. in the last 40 years</a>. High inflation means the prices people pay for goods and services are continually going up – <a href="https://www.bls.gov/news.release/cpi.nr0.htm">especially for basic items</a> like meat and gasoline, as well as for manufactured goods like cars. </p>
<p>The Fed can ill afford to allow this to continue because if higher inflation becomes entrenched, it <a href="https://www.ft.com/content/ddd02d7a-1557-4357-af6f-7c433da1b406">would damage the economy</a>. And the longer it lasts, the harder – and more painful for consumers and businesses – it is going to be to bring it back to a more sustainable 2%. </p>
<p>So the Fed has to act quickly before it’s too late. </p>
<h2>2. How does the Fed raise rates?</h2>
<p>The Fed sets a target range for what is called the “<a href="https://www.chicagofed.org/research/dual-mandate/the-federal-funds-rate">federal funds rate</a>.” This rate acts like a benchmark for all interest rates in the economy. </p>
<p>While the Fed’s statement didn’t specify a time when it plans to raise rates, <a href="https://www.nytimes.com/2022/01/26/business/economy/fed-interest-rates-inflation.html">Chair Jerome Powell said</a> “the committee is of a mind to raise the federal funds rate at the March meeting, assuming that the conditions are appropriate for doing so. <a href="https://www.bloomberg.com/news/articles/2022-01-26/fed-signals-liftoff-soon-sees-asset-reduction-start-afterward?srnd=premium&sref=Hjm5biAW">Analysts expect it to be a 0.25 percentage point increase</a>. This would affect banks’ cost of borrowing, which in turn slowly filters throughout the economy as lenders charge more for loans on homes, cars, businesses, college tuition and anything else you might want to buy with debt. Banks would also gradually increase the interest they offer on deposits and savings accounts. </p>
<p>The Fed does not directly control all these other rates, and the exact path they will take is not completely predictable, but the overall trend will be up if the Fed keeps raising its target rate. </p>
<p>Markets expect the Fed to raise interest rates <a href="https://www.reuters.com/business/fed-raise-rates-three-times-this-year-tame-unruly-inflation-2022-01-20/">at least two more times in 2022</a>. </p>
<h2>3. What does that mean for consumers and businesses?</h2>
<p>Put simply, higher interest rates mean borrowers would need to pay more for the loans they get. </p>
<p>If the Fed lifts interest rates this year by 0.75 percentage point, as expected, this would translate into about US$45,000 in additional interest payments on a 30-year, $300,000 mortgage.</p>
<p>[<em>Get the best of The Conversation, every weekend.</em> <a href="https://memberservices.theconversation.com/newsletters/?nl=weekly&source=inline-weeklybest">Sign up for our weekly newsletter</a>.]</p>
<p>So if you want to borrow to start a business, pay for college, buy a car or do anything else, you should expect your borrowing costs to be higher later this year. </p>
<p>On the other hand, higher rates is good news for savers and investors, as their returns from activities like making deposits and buying bonds will go up. </p>
<h2>4. And how will it affect the broader economy?</h2>
<p>Higher interest rates would likely slow down business activity. While this can help reduce inflation, it also means lower economic growth. </p>
<p>The Fed always makes decisions based on what is happening in the economy and on how economic conditions are expected to change. And changes in the economy are often hard to predict.</p>
<p>The biggest unknown at this point is what will happen to inflation later this year. This is uncertain because inflation is <a href="https://www.cwmnw.com/blog/all-you-need-to-know-about-inflation-the-reality-of-supply-chain-shortages-and-money-supply">driven by multiple factors</a>, such as supply chain shortages and strong demand. </p>
<p>In addition, the <a href="https://fred.stlouisfed.org/series/CIVPART">labor force participation rate</a> has still not recovered to pre-pandemic levels, and the economy <a href="https://www.cbsnews.com/news/covid-small-businesses-inflation-supply-chain-recruiting-federal-aid/">is experiencing labor shortages</a>, which could push wages and prices higher. If these COVID-19-related pressures don’t ease up soon, inflation could continue to stay high or continue to accelerate, which may force the Fed to increase interest rates faster than currently expected. </p>
<p>On the other hand, if economic or employment growth stalls, this will make it much harder for the Fed to raise rates without making things worse. The Fed will need to find the right balance between taming inflation and avoiding slowing down the economy too much. </p>
<p><em>Article updated to add GDP report and Powell comment.</em></p><img src="https://counter.theconversation.com/content/175791/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The US central bank said surging inflation is guiding its decision about when to lift interest rates. Two experts on financial markets explain what might happen next.Alexander Kurov, Professor of Finance and Fred T. Tattersall Research Chair in Finance, West Virginia UniversityMarketa Wolfe, Associate Professor of Economics, Skidmore CollegeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1735722021-12-10T16:11:35Z2021-12-10T16:11:35ZWhy is inflation so high? Is it bad? An economist answers 3 questions about soaring consumer prices<figure><img src="https://images.theconversation.com/files/436961/original/file-20211210-92077-ku5hu9.jpg?ixlib=rb-1.1.0&rect=140%2C90%2C5377%2C3333&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Used car and truck prices are up 31% over the previous year.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BizUsedCarSales/8800bac7d31449b3b8e8dea920ac7fb7/photo?Query=used%20car%20lot&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=230&currentItemNo=15">AP Photo/David Zalubowski</a></span></figcaption></figure><p><em>Consumer prices <a href="https://www.bls.gov/news.release/cpi.nr0.htm">jumped 6.8% in November 2021 from a year earlier</a> – the fastest rate of increase since 1982, according to Bureau of Labor Statistics data published on Dec. 10, 2021. The biggest jumps during the month were in energy, used cars and clothing. The Conversation U.S. asked University of South Carolina economist <a href="https://scholar.google.com/citations?user=B744wv0AAAAJ&hl=en&oi=ao">William Hauk</a> to explain what’s driving the recent increase in inflation and how it affects consumers, companies and the economy.</em></p>
<h2>1. Why is inflation running so high?</h2>
<p>There are two basic reasons why inflation has been increasing: supply and demand. </p>
<p>Starting with the latter, <a href="https://www.bea.gov/news/2021/personal-income-and-outlays-october-2021">consumers are on a spending spree</a> after having spent most of 2020 at home bingeing on Netflix. Now that more people are vaccinated, many feel increasingly confident going to the stores again and are demanding more goods and services. </p>
<p><a href="https://www.nytimes.com/2021/06/02/us/politics/stimulus-checks-economic-hardship.html">Adding support to households’ buying power</a> are the stimulus checks and other pandemic-related aid that have gone out to American families during the pandemic. The resulting increase in spending has been good for <a href="https://www.investopedia.com/ask/answers/111314/what-causes-inflation-and-does-anyone-gain-it.asp">stimulating the economy</a>, but more demand typically results in higher prices. </p>
<p>The increased demand might not be too bad for inflation on its own, but the U.S. economy is also <a href="https://abcnews.go.com/Politics/whats-causing-americas-massive-supply-chain-disruptions/story?id=80587129">experiencing significant supply chain problems</a> tied to the COVID-19 pandemic. This is driving up the cost of production and reducing the supply of goods, also pushing up prices. </p>
<p>What’s more, wages are jumping as well – <a href="https://www.bls.gov/news.release/empsit.nr0.htm">up 4.8% in November</a> from a year earlier – as employers in many industries offer more money to retain or hire people. This news is great for workers, but companies often have to pass on these higher costs to consumers. </p>
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<h2>2. Is inflation always bad?</h2>
<p>Inflation isn’t always bad news. A little bit is actually quite healthy for an economy. </p>
<p>If prices are falling – something known as deflation – companies may be hesitant to invest in new plants and equipment, and unemployment might rise. And inflation can make it easier for some households with higher wages to pay off debts. </p>
<p>However, inflation running at 5% or higher is a phenomenon the U.S. hasn’t seen since the early 1980s. Economists <a href="https://www.haukeconomics.com/">like myself</a> believe that higher-than-normal inflation is bad for the economy for many reasons. </p>
<p>For consumers, higher prices on essential goods like food and gasoline <a href="https://theconversation.com/the-pandemic-has-made-it-even-harder-for-one-in-three-americans-to-obtain-healthy-affordable-food-169985">may become unaffordable</a> for people whose paychecks aren’t rising as much. But even when their wages are rising, higher inflation makes it harder for consumers to tell if a particular good is getting more expensive relative to other goods, or just in line with the average price increase. This can make it harder for people to budget appropriately. </p>
<p>What is true for households is true for companies as well. Businesses see the prices of key inputs, like oil or microchips, rise. They may want to pass on these costs to consumers, but could be limited in their ability to do so. As a result, they may have to cut back production, increasing supply chain problems.</p>
<h2>3. What are the biggest risks?</h2>
<p>If inflation stays elevated for too long, <a href="https://www.investopedia.com/articles/insights/122016/9-common-effects-inflation.asp">it can lead to something economists call hyperinflation</a>. This is when expectations that prices will be keep rising fuels more inflation, which reduces the real value of every dollar in your pocket.<br>
In the most extreme cases – think <a href="https://www.theguardian.com/money/2016/may/14/zimbabwe-trillion-dollar-note-hyerinflation-investment">Zimbabwe in the late 2000s</a> – spiraling prices can lead to a collapse in a currency’s value. People will want to spend any money they have as soon as they get it for fear that prices will rise even over short periods of time.</p>
<p>The U.S. is nowhere near this situation, but central banks like the Federal Reserve want to avoid it at all costs so they typically step in to try to reduce inflation before it gets out of control. </p>
<p>The problem is the main way it does that is by raising interest rates, which slows the economy. If the Fed is forced to raise interest rates too quickly, it can even cause a recession and result in higher unemployment – as the <a href="https://www.federalreservehistory.org/essays/recession-of-1981-82">U.S. experienced in the early 1980s</a>, around the last time inflation was this high. Then-Fed chair Paul Volcker did manage to rein in inflation from as high as about 14% in 1980 – at the <a href="https://www.stlouisfed.org/publications/regional-economist/january-2005/volckers-handling-of-the-great-inflation-taught-us-much">cost of double-digit unemployment rates</a>.</p>
<p>Americans are not yet seeing inflation nearly that high, but preventing the U.S. from getting there <a href="https://theconversation.com/jerome-powell-keeps-his-job-at-the-fed-where-hell-be-responsible-for-preventing-inflation-from-spiraling-out-of-control-without-tanking-the-economy-171812">is almost certainly on the mind</a> of Jerome Powell, who currently leads the Fed.</p>
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<p class="fine-print"><em><span>William Hauk has received funding from the Center for International Business Education and Research (CIBER), which is administered by the U.S. Department of Education. </span></em></p>Inflation is rising at the fastest pace since Ronald Reagan was president.William Hauk, Associate Professor of Economics, University of South CarolinaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1718122021-11-19T18:42:31Z2021-11-19T18:42:31ZJerome Powell keeps his job at the Fed, where he’ll be responsible for preventing inflation from spiraling out of control – without tanking the economy<figure><img src="https://images.theconversation.com/files/432865/original/file-20211119-27-iarj4u.jpg?ixlib=rb-1.1.0&rect=112%2C160%2C5252%2C3643&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Biden reappointed Jerome Powell, seated at left, to head the Fed. Some progressives wanted him replaced with Lael Brainard, seated right. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/FederalReserveMeeting/ec240988c96a4e4da0ff36ea42d22f40/photo?Query=Jerome%20powell&mediaType=photo&sortBy=arrivaldatetime:asc&dateRange=Anytime&totalCount=1280&currentItemNo=21">AP Photo/Manuel Balce Ceneta</a></span></figcaption></figure><p>The person who helms the Federal Reserve is <a href="https://fortune.com/2018/01/24/who-is-jerome-powell-fed-trump/">one of the most powerful</a> figures in the world. Their job is also one of the most impactful on the lives of ordinary Americans, not to mention others across the world. </p>
<p>That will be especially true in the coming months as the Fed seeks to tame <a href="https://theconversation.com/why-are-prices-so-high-blame-the-supply-chain-and-thats-the-reason-inflation-is-here-to-stay-169441">soaring prices</a> without jeopardizing the economic recovery. The consequences of getting it wrong could be catastrophic and result in higher inflation, a <a href="https://www.bloomberg.com/news/newsletters/2021-10-11/what-s-happening-in-the-world-economy-the-u-s-recession-risk">return to recession</a> or, worse, the Fed might have to <a href="https://www.bruegel.org/2021/11/is-the-risk-of-stagflation-real/">deal with stagflation</a> – in which you get both rising prices and a sluggish economy. </p>
<p><a href="https://www.federalreserve.gov/aboutthefed/bios/board/powell.htm">Jerome Powell is the current chair</a> of the Fed, but his first term was set to expire in February. <a href="https://www.economist.com/the-economist-explains/2021/10/25/who-is-lael-brainard-progressive-democrats-choice-to-lead-the-fed">Progressive Democrats had been pushing</a> President Joe Biden to replace him with <a href="https://www.federalreserve.gov/aboutthefed/bios/board/brainard.htm">Lael Brainard</a>, a Harvard economist who is currently serving as the <a href="https://en.wikipedia.org/wiki/Federal_Reserve_Board_of_Governors">only registered Democrat</a> on the board of governors of the Federal Reserve System. Progressives prefer her in part because she appears to be more sympathetic to <a href="https://www.federalreserve.gov/newsevents/speech/brainard20181207a.htm">more financial regulation</a> and <a href="https://www.cnbc.com/2021/10/07/fed-governor-anticipates-climate-change-guidance-coming-for-big-banks.html">Fed action on climate change</a>. </p>
<p>On Nov. 22, 2021, Biden <a href="https://www.bloomberg.com/news/articles/2021-11-22/biden-keeps-powell-as-fed-chief-elevates-brainard-to-vice-chair?srnd=premium&sref=Hjm5biAW">announced he was sticking with Powell</a>, after weeks in which Wall Street investors, <a href="https://scholar.google.com/citations?hl=en&user=GyTN5PYAAAAJ">economists like me</a> and other central bankers around the world <a href="https://www.usnews.com/news/economy/articles/2021-11-11/as-biden-nears-chance-to-remake-the-fed-the-guessing-game-over-chairman-powells-renomination-intensifies">impatiently waited</a> word. Powell had long been considered <a href="https://www.predictit.org/markets/detail/7398/Whom-will-the-Senate-next-confirm-as-Chair-of-the-Federal-Reserve">very likely to keep the job</a>. Biden also elevated Brainard, nominating her to be vice chair. Both moves are subject to Senate confirmation. </p>
<p>But what are the responsibilities of the Fed and its chair? And what serious challenges will Powell face come 2022 and beyond?</p>
<h2>Meet the chair</h2>
<p>Most introductory macroeconomics textbooks – like the ones I use to teach my students – note that <a href="https://courses.lumenlearning.com/wmopen-macroeconomics/chapter/the-federal-reserve-banking-system-and-central-banks/">the chair of the Fed is so influential</a> that he or she can make financial markets crash or soar just by uttering a few words in public. Investors admit they scrutinize and dissect <a href="https://www.marketplace.org/2019/07/19/how-a-simple-statement-from-fed-chair-jerome-powell-can-cause-the-markets-to-fluctuate/">every single word the Fed chair says</a> and even count the number of times a certain key phrase is used – I call it “Fed speech bingo.”</p>
<p>While all of this might be a bit of a hyperbole to make students pay more attention to an admittedly boring chapter on money and banking, it’s undeniable that the Fed chair is very important. </p>
<p>The position is ultimately responsible for regulating the banking system, promoting stability of the financial system and conducting monetary policy by controlling the money supply and setting interest rates – <a href="https://www.investopedia.com/terms/f/federalreservebank.asp">the main duties</a> of the Federal Reserve. Seven governors, including the chair, oversee the Fed, and each has a single vote over key policy decisions like interest rates. But the chair wields significant power by setting the agenda and acting as the public voice of the Fed. </p>
<p>The Fed’s most important job is conducting <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20200827a.htm">monetary policy</a>, which involves the control of the money supply in order to promote sustainable economic growth. The main tool used to achieve this is “targeting” the short-term interest rate to achieve low inflation and stable employment. This is what is referred to as <a href="https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm">the Fed’s dual mandate</a>. In recent years, the Fed <a href="https://www.investopedia.com/terms/q/quantitative-easing.asp">has also turned to more unconventional methods</a>, like purchasing commercial bonds and other assets. </p>
<p>What this means for the rest of us is that the Fed helps set the rates we pay on mortgages, car loans, credit cards and other types of borrowing. Lower rates mean credit is cheaper, which boosts the economy. But this in turn can drive up inflation. </p>
<p>The Fed can lift rates to reduce inflation, but raising the cost of credit can hurt economic growth and lead to higher unemployment. </p>
<p>This is exactly the careful balancing act facing the Fed right now. </p>
<figure class="align-center ">
<img alt="A nearly empty case of different chicken cuts is displayed at a Publix Supermarket in Miami." src="https://images.theconversation.com/files/432897/original/file-20211119-22767-7trv8i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/432897/original/file-20211119-22767-7trv8i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/432897/original/file-20211119-22767-7trv8i.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/432897/original/file-20211119-22767-7trv8i.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/432897/original/file-20211119-22767-7trv8i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/432897/original/file-20211119-22767-7trv8i.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/432897/original/file-20211119-22767-7trv8i.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Prices of chicken and other goods have been surging lately.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/OffTheCharts-FoodPricesThreatenMargins/abd25dfb5cb64a8dafc9ea6d91906018/photo?Query=inflation%20prices&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=1296&currentItemNo=1">AP Photo/Marta Lavandier</a></span>
</figcaption>
</figure>
<h2>The dual mandate – hawks and doves</h2>
<p>Americans across the country are seeing higher prices at the mall, grocery store and gas pump as inflation, as measured by the Consumer Price Index, <a href="https://abcnews.go.com/Business/americans-inflation-hits-30-year-high/story?id=81110162">shows it soaring at the fastest pace in over three decades</a>. At the same time, the labor market hasn’t fully recovered from the <a href="https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions">pandemic-induced recession</a> early last year, with <a href="https://fred.stlouisfed.org/series/PAYEMS">4 million fewer employed people</a> than in February 2020. </p>
<p>The focus for the Fed right now is clearly on the price increases that were <a href="https://apnews.com/article/inflation-health-coronavirus-pandemic-business-6e7c813472a3eb706e0cdafe305c1477">initially expected to be short-term</a> and should have stabilized by now. Most economists believe the <a href="https://now.tufts.edu/articles/what-s-causing-rising-prices-gas-food-cars-toys-and-more">recent price gains</a> reflect temporary supply bottlenecks and the fact that prices fell sharply in the spring of 2020 at the onset of the COVID-19 pandemic, which make inflation figures now look much larger. </p>
<p>The big decision that the Fed and its chair will have to make in the coming months is when to begin raising interest rates to tame inflation. If they move too much or too soon, they risk causing an economic downturn, which could lead to substantial job losses. If they act too little or too late, they risk letting inflation get out of control – as Americans <a href="https://fred.stlouisfed.org/series/FPCPITOTLZGUSA">last experienced in the late 1970s</a>. </p>
<p>In the language used by Fed watchers, this is the difference <a href="https://thebusinessprofessor.com/economic-analysis-monetary-policy/dove-monetary-policy-definition">between being a hawk and a dove</a>. That is, a hawk is more concerned more about fighting inflation, while a dove focuses more on growth and jobs. </p>
<p>While most <a href="https://www.ai-cio.com/news/powell-or-brainard-the-next-fed-chair-makes-little-difference-wells-fargo-says/">experts on monetary policy believe</a> things would be pretty similar whether Powell or Brainard is in charge, the latter <a href="https://www.marketwatch.com/story/brainard-interviewed-at-white-house-for-fed-chair-report-11636451220">is slightly more of a dove</a> – meaning she was seen as more likely to put employment before fighting inflation.</p>
<p>In 2022, Powell will have to quickly decide what his top priority will be – with the specter of stagflation also emerging as a possible scenario. </p>
<h2>Other issues on the chair’s agenda</h2>
<p>The <a href="https://www.federalreserve.gov/publications/gpra/2011-mission-values-and-goals-of-the-board-of-governors.htm">Fed is also responsible</a> for fostering stability, integrity and efficiency of the nation’s monetary and financial system, <a href="https://finance.yahoo.com/news/why-the-fed-chair-needs-to-care-about-financial-regulation-171911971.html">mainly through regulation</a>.</p>
<p><a href="https://www.businessinsider.com/stock-market-crash-expert-warns-bubble-now-crypto-richard-bernstein-2021-10">Financial bubbles are inflating in multiple markets</a> from stocks to digital currencies – thanks in part to the Fed’s policy of easy money that has helped drive up prices. <a href="https://www.thebalance.com/what-caused-2008-global-financial-crisis-3306176">Inattention to financial stability</a> was one reason the Fed missed the great financial crisis until it was too late. </p>
<p>Powell will have to decide whether to make this a higher priority, particularly if the Fed lifts interest rates soon. Doing so could cause a market crash.</p>
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<p>Finally, the Fed is facing pressure to tackle problems beyond its mandate, such as <a href="https://www.npr.org/2021/10/27/1049835705/can-the-fed-help-solve-climate-change">climate change</a> and inequality. This is one of the main reasons Brainard’s in the running in the first place. </p>
<p>Progressive Democrats and activists are urging the Fed to use its regulatory powers to <a href="https://350.org/press-release/fossil-free-fed-launch">restrict the flow of capital away from carbon-intensive industries</a> and redirect the money toward more climate-friendly ones. This idea is controversial because it’s not in its mandate, <a href="https://www.marketwatch.com/story/fed-needs-to-say-it-will-no-longer-buy-corporate-bonds-to-break-feedback-loop-says-this-fixed-income-cio-11624323969">it risks hurting Fed independence</a> and can ultimately lead to misallocation of resources. </p>
<p>Similarly, Nobel Prize-winning economist <a href="https://www.theguardian.com/business/2021/nov/10/why-the-federal-reserve-chair-jerome-powell-must-go">Joseph Stiglitz</a> and other liberals want the Fed to do more to fight inequality. <a href="https://www.wbur.org/onpoint/2021/11/01/a-banking-insider-on-why-the-federal-reserve-is-an-engine-of-inequality">Research</a> shows that the <a href="https://www.propublica.org/article/how-the-federal-reserve-is-increasing-wealth-inequality">Fed’s policies are contributing to wealth inequality</a>. </p>
<p>While the Fed is probably not able to fix the issues of wealth and income inequality – these are complicated, complex issues requiring congressional action, new legislation or law enforcement – it could at least start to pay more attention to its actions so that it is not actively contributing to the problem. </p>
<h2>Continuity or change</h2>
<p>But the selection of the Fed chair isn’t the only way Biden will be able to leave his mark on the central bank. </p>
<p>Over the next weeks, he has to fill <a href="https://apnews.com/article/joe-biden-business-jerome-powell-financial-crisis-d1b7874de4ea172c6eac5d52d025a78f">three other open spots on the Federal Reserve’s board of governors</a>, which provides him with an opportunity for a complete makeover and allows him to shift the Fed’s board toward a more Democratic-dominated one. And naming Brainard vice chair also furthers this agenda. </p>
<p>This may mean the Fed could still end up helping the Biden administration pursue progressive goals like fighting climate change and inequality, even with Powell at the top.</p>
<p>Either way, Americans would be wise to pay close attention to the Fed and who runs it. </p>
<p><em>This story has been updated to reflect Biden’s choice of Powell as Fed chair.</em></p><img src="https://counter.theconversation.com/content/171812/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Veronika Dolar does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>After weeks of mulling, Biden decided to give Powell another term as Fed chair, which means he will have more influence over the trajectory of inflation than anyone else.Veronika Dolar, Assistant Professor of Economics, SUNY Old WestburyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1608492021-05-13T18:35:17Z2021-05-13T18:35:17ZWhy the inflation rate doesn’t tell the whole story – all it takes is a spike in a category like used cars to cause consumer prices to soar<figure><img src="https://images.theconversation.com/files/400607/original/file-20210513-13-lyiezp.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5856%2C3934&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A big increase in use car prices drove the inflation rate higher in April.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/UsedCarSales/a9d5356b7637409b82cd2898c0d59acd/photo?Query=used%20AND%20cars&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=4335&currentItemNo=112">AP Photo/David Zalubowski</a></span></figcaption></figure><p>Markets, economists and policymakers <a href="https://www.cnn.com/2021/05/01/economy/overheating-economy-inflation/index.html">have been fretting about inflation for months</a>, worried that the trillions of dollars being spent in recent and future government stimulus programs could overheat the economy and send prices soaring. </p>
<p>On May 12, 2021, the worrywarts seemed to have their fears confirmed when the <a href="https://www.bls.gov/news.release/cpi.nr0.htm">April consumer price index shot up a seasonally adjusted 0.8%</a>, the biggest jump since 2008. The year-over-year inflation rate of 4.2% is double what the <a href="https://www.federalreserve.gov/faqs/economy_14400.htm">Federal Reserve has set as its target</a>. </p>
<p>Should consumers be concerned? </p>
<p>As a <a href="https://scholar.google.com/citations?user=1E8KAEsAAAAJ&hl=en&oi=ao">finance expert</a>, I believe the answer to this question lies in a closer look at what actually goes into the main way the U.S. measures inflation. </p>
<h2>What is inflation?</h2>
<p><a href="https://www.bls.gov/cpi/questions-and-answers.htm#Question_7">Inflation is defined</a> as the change in the price of everything from a rib-eye steak and a bar of Ivory soap to an eye exam or tank of gas. </p>
<p>In the U.S., the most commonly used measure of inflation is based on the <a href="https://www.bls.gov/cpi/">consumer price index</a>. Simply put, the index is the average price of a basket of goods and services that households typically purchase. It’s often used to determine pay raises or to adjust benefits for retirees. The year-over-year change is what we call the inflation rate. </p>
<p>Since this is an average across a range of categories, the <a href="https://www.bls.gov/news.release/cpi.t02.htm">main number masks lots of key details</a> and big month-to-month swings in various goods and services. For example, airline fares jumped a seasonally adjusted 10% in April – partly recovering from their pandemic plunge – while shelf-stable fish and seafood declined 3.5%. </p>
<p>Food and energy prices in particular can be very volatile, and, for that reason, policymakers often focus on what is known as “core inflation,” which excludes those numbers. </p>
<p>A moderate amount of inflation is generally considered to be a sign of a healthy economy, because as the economy grows, demand for stuff increases. This increase in demand pushes prices a little higher as suppliers try to create more of the things that consumers and businesses want to buy. Workers benefit because this economic growth drives an increase in demand for labor, and as a result, wages usually increase – as the <a href="https://www.bls.gov/news.release/empsit.nr0.htm">latest jobs report suggests</a> is beginning to happen. </p>
<p>Workers with higher wages then can go out and buy more stuff, part of a “virtuous” cycle that keeps the economy humming. Inflation isn’t really causing all this to happen – it is merely the symptom of a healthy, growing economy.</p>
<p>But when inflation is too high – or too low – a “vicious” cycle can take its place. If left unchecked, inflation could spike, which would likely cause the economy to slow down quickly and unemployment to increase. The combination of rising inflation and unemployment is called “<a href="https://www.investopedia.com/articles/economics/08/1970-stagflation.asp">stagflation</a>,” and is feared by economists, central bankers and pretty much everyone else.</p>
<p>It’s what can cause an economic boom to suddenly turn to bust, as <a href="https://www.investopedia.com/articles/economics/08/1970-stagflation.asp">Americans saw in the late 1970s</a>. The Fed managed to reduce inflation to normal levels only after driving up short-term interest rates to a <a href="https://www.thebalance.com/fed-funds-rate-history-highs-lows-3306135">record 20% in 1979</a>. </p>
<p><iframe id="BBaXK" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/BBaXK/4/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>What’s behind the increase in the inflation rate?</h2>
<p>So, how can we determine if this is happening now? Let’s take a closer look at what makes up the consumer price index. </p>
<p>Much of the increase in April was driven by used car and truck prices, which jumped 10% during the month, by far the biggest increase of any category that makes up at least 1% of the index. As has been reported, that was largely due to a <a href="https://www.bloomberg.com/news/articles/2021-05-12/record-surge-in-used-car-prices-is-key-culprit-in-inflation-jump?sref=Hjm5biAW">surge in buying by rental car companies</a>, which sold off much of their inventories early in the pandemic, as well as the global chip shortage that <a href="https://abcnews.go.com/Business/wireStory/chip-shortage-cars-scarce-prices-77645971">has reduced production of new vehicles</a>. Other price increases, such as for <a href="https://www.housingwire.com/articles/supply-chain-issues-still-stymieing-homebuilders/">lumber</a> and some electronics, are also tied to short-term supply chain problems. </p>
<p>Increased demand from consumers who have received stimulus checks is another possible cause of price increases, but it’s harder to quantify the effect.</p>
<p>Most categories were much lower. Food prices grew 0.4%, driven by demand for takeout, and energy was down 0.1% – though that was before <a href="https://www.usatoday.com/story/money/2021/05/11/colonial-pipeline-gas-shortage-cyber-attack/5035713001/">May’s East Coast pipeline problems</a>. </p>
<p>Because the consumer price index is made up of a range of goods and services, it’s often the case that changes in the index – and therefore inflation – are being driven by just one or two parts of the economy, as opposed to an across-the-board price change. In the case of April prices, transportation-related items like used vehicles and airfares and energy services like electricity were the biggest drivers. And these appear to be transitory increases. </p>
<h2>Nothing to fret about – for now</h2>
<p>This is why most economists <a href="https://www.cnbc.com/2021/05/12/investors-worry-about-inflation-data-economists-see-sign-of-growth.html">don’t think the U.S. is heading into a new period of high inflation</a>. Instead, there is evidence of <a href="https://www.marketplace.org/2021/02/25/consumers-may-be-ready-to-release-their-pent-up-demand/">pent-up demand</a>, particularly for services that were unavailable during the height of the pandemic in the U.S., which may result in some short-term jumps in prices. </p>
<p>There are signs that inflation will be a bit high for another month or two, but it should return to more normal levels of around 2% per year by the end of 2021. The <a href="https://www.bloomberg.com/opinion/articles/2021-05-12/inflation-is-not-just-inevitable-it-s-part-of-the-fed-s-plan?sref=Hjm5biAW">Fed is banking on this as well</a>. </p>
<p><em>Like what you’ve read? <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=likethis">Sign up for The Conversation’s daily newsletter</a>.]</em></p>
<p>So, back to our initial question: Is there any reason for alarm? </p>
<p>I don’t think so, nor do most economists or the Fed. Others, <a href="https://www.cnbc.com/2021/05/12/investors-worry-about-inflation-data-economists-see-sign-of-growth.html">especially investors</a>, disagree. We won’t know who is ultimately right for some time.</p>
<p>Meanwhile, consumers can expect to pay a bit more this summer if they’re finally planning to take a vacation after a year stuck at home, buy a used car to travel the country or build a new home. But even at higher prices, these are all signs of the return of a well-functioning economy – and normal life.</p>
<p><em>This article is an expanded version of a <a href="https://theconversation.com/drafts/145426/edit">story published on Sept. 17, 2020</a>.</em></p><img src="https://counter.theconversation.com/content/160849/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard S. Warr does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The average price of US goods and services surged in April, leading some to worry the economy is beginning to experience dangerously high levels of inflation. A scholar explains why that’s unlikely.Richard S. Warr, Professor of Finance, North Carolina State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1563352021-03-07T19:33:40Z2021-03-07T19:33:40ZWhy the return of high inflation can no longer be excluded<figure><img src="https://images.theconversation.com/files/387242/original/file-20210302-23-brjy8r.jpg?ixlib=rb-1.1.0&rect=0%2C110%2C8228%2C5358&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Since its creation in 1999, the inflation rate in the euro zone has only exceeded 4 percent for a few months, on the eve of the Great Recession of 2008.
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/midsection-businessman-placing-shopping-cart-on-703848340">Shutterstock</a></span></figcaption></figure><p>The Covid-19 pandemic has caused worldwide economic devastation. In the EU and the United States, many early emergency measures sought to address the shortcomings and disorganization of health care systems. Other policy measures were textbook demand-management and liquidity-provision programs, not unlike those adopted during the 2008-2009 global financial crisis.</p>
<p>While many economists called attention on the <a href="https://voxeu.org/article/how-should-we-think-about-containing-covid-19-economic-crisis">supply-side impact</a> of a pandemic-driven economic crisis, policy measures implemented in 2020 mostly discarded this caveat. Assuming that the demand shock is much stronger than the supply shock, the fall in output could only be accompanied by stable or falling prices. This dominant mindset is summarized by economist Joseph Stiglitz, who in February 2021 <a href="https://www.project-syndicate.org/commentary/biden-right-to-launch-massive-rescue-plan-by-joseph-e-stiglitz-2021-02">referred to inflation</a> as a “bogeyman that is more fantasy than real threat nowadays”. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/388162/original/file-20210307-19-1mo341k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/388162/original/file-20210307-19-1mo341k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/388162/original/file-20210307-19-1mo341k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=795&fit=crop&dpr=1 600w, https://images.theconversation.com/files/388162/original/file-20210307-19-1mo341k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=795&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/388162/original/file-20210307-19-1mo341k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=795&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/388162/original/file-20210307-19-1mo341k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=999&fit=crop&dpr=1 754w, https://images.theconversation.com/files/388162/original/file-20210307-19-1mo341k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=999&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/388162/original/file-20210307-19-1mo341k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=999&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Over the last 25 years, inflation has been remarkably low, exceeding 4% only briefly. Shown, a gas station in San Pedro, California, in 2008.</span>
<span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Given the current circumstances, central banks can and even should subordinate their action to whatever fiscal policy requires. And because a central bank is the lender of last resort, the government can spend what it takes to restore full employment, which is exactly what proponents of <a href="https://www.vox.com/future-perfect/2019/4/16/18251646/modern-monetary-theory-new-moment-explained">Modern Monetary Theory</a> (MMT) assert. </p>
<p>To be fair, in the last 25 years inflation has been <a href="https://www.macrotrends.net/2497/historical-inflation-rate-by-year">remarkably low</a>, not only in structurally crippled economies such as Japan, but also in dynamic economies that have experienced episodes of high growth. In the United States, the inflation rate exceeded 4% only briefly in 2005 and in the wake of the Global Financial Crisis of 2008. Since the creation of the European Monetary Union in 1999, the inflation rate exceeded 4% only for a few months in 2008. Inflation skeptics point out that the inflation was low despite central banks engaging in massive asset-purchase programs that multiplied their balance sheets by a factor of four. However, they put less emphasis on the fact that the monetary base did not increase much, with many commercial banks holding huge amounts of reserves with the central banks.</p>
<iframe src="https://data.oecd.org/chart/6iCm" width="100%" height="545" style="border: 0" mozallowfullscreen="true" webkitallowfullscreen="true" allowfullscreen="true"><a href="https://data.oecd.org/chart/6iCm" target="_blank">OECD Chart: Inflation (CPI), Total, Annual growth rate (%), 1990 – 2020</a></iframe>
<p>In our view, inflation has not been eradicated by some magic spell. We will strive to explain why it was so low during these last 25 years. This analysis will allow us to call attention to how the Covid-19 shock could push us from a low- to a high-inflation regime, with major implications for monetary and fiscal policy.</p>
<h2>Low inflation in the past</h2>
<p>Because we adopt a short-term perspective, we will leave aside the <a href="https://voxeu.org/article/friedman-vs-phillips-historic-divide">quantity of money explanation of inflation</a> (David Hume, Irving Fisher, Milton Friedman), and just call attention on the unusual acceleration of monetary aggregates in the euro area and the United States in the last few months of 2021. The explanation we use here relies on the <a href="https://www.pearson.com/us/higher-education/program/Blanchard-Macroeconomics-7th-Edition/PGM333935.html">expectation-augmented Phillips curve</a>, which has been for decades the dominant policymaking framework.</p>
<p>Here, a key factor driving inflation is the tension between aggregate supply and aggregate demand. These are not accounting concepts; both aggregates react to various economic variables according to well-established principles. There should be an amount of goods for which all the available resources, namely labor and capital, are used close to their full capacity, which is refereed to potential output. If demand for a good becomes too strong, wages will go up and, sooner or later, firms with market power will increase their prices to preserve their profit margin. This is the <a href="https://www.imf.org/external/pubs/ft/fandd/2013/09/basics.htm">output gap</a> determinant of inflation.</p>
<p>On the other hand, how wages and prices evolve depends in an essential way on employees’ inflation expectations. If they believe prices will increase in the future, they tend to be more demanding during wage negotiations, and wages and prices can in turn rise. In the <a href="https://www.aeaweb.org/articles?id=10.1257/jel.37.4.1661">modern versions</a> of the Phillips curve theory, expectations of future inflation enter as an inflation determinant, as they capture firms’ response to expected cost increases.</p>
<p>The low inflation observed in the last 25 years, even during upward sequences of the business cycle, could be explained by:</p>
<ul>
<li><p>Factors that justify some wage moderation during the wage bargaining: weaker unions, immigrant labor, fear of offshoring, etc.</p></li>
<li><p>Factors that would prevent firms from raising prices: increased competition due to globalization, import competition from low wage countries…</p></li>
<li><p>Inflation expectations that are anchored to a low target level: 2% annual increase in prices for a majority of developed countries.</p></li>
</ul>
<p>How have central banks managed to anchor inflation expectations? To use the words of Gary Becker, by <a href="https://www.jstor.org/stable/3440130">“relentlessly and unflinchingly”</a> pursuing a policy of low inflation. Doing so requires making hard choices. By resisting politicians’ calls for depreciating the currency or cutting interest rates whenever the latter were not happy with the unemployment numbers, central banks built their reputation capital. Unfortunately, as we know from private life, if it takes years to build reputation, it takes minutes to destroy it.</p>
<h2>Demand-pull deflation versus cost-push inflation</h2>
<p>Many have understood the Covid-19 recession as a demand crisis, similar in all respects to the 2007-08 global financial crisis. Because consumption and investment fell, a sufficient policy answer is to substitute public spending for the missing private spending. This neglects the fact that, in many sectors, the 2019 output just cannot be produced. In other cases, goods and services can be produced, but at much higher costs. Furthermore, some of the resources have been oriented toward production of goods that in normal times are not widely needed (surgical gloves, masks, respirators, even vaccines).</p>
<p>In the EU and many US states, governments imposed strict lockdowns, and in some countries did so for more than a full year. Restaurants, theaters, hotels, many leisure activities, were and still shut down. Sanitary restrictions were implemented in factories, slowing production and raising costs. Schools were shut, forcing people to stay at home and drop their productive activities when distance work was not an option. Obligatory distance work was initially perceived by some as a benefit, yet for others it has eroded staff morale and focus. The disorganization of the world supply and distribution chains, the shortage to temporary construction and agriculture workers, even shortages of shipping containers, all had widely felt impacts on production costs.</p>
<p>Increases in costs erode profit margins and can prompt firms to raise prices. The protectionism (nationalistic) mood in major economies – including in the United States under both the Trump and Biden administrations – is reducing the competitive pressure on prices.</p>
<p>All these changes can lead to a contraction in potential output. Pretending that the pre-pandemic national production level can be achieved by increasing public spending is simply fallacious. No matter how many dollars, euros, or pounds people hold in their saving accounts, if the restaurants are closed by decree, the restaurant sector output will be zero. If the overall demand increases, but it costs more to produce a given amount of input, an increase in prices is unavoidable.</p>
<figure class="align-center ">
<img alt="Joseph E. Stiglitz, professor at Columbia University and winner of the 2001 Nobel Prize for economics, speaks at a World Economic Forum even in 2015." src="https://images.theconversation.com/files/388161/original/file-20210307-13-17j20zx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/388161/original/file-20210307-13-17j20zx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/388161/original/file-20210307-13-17j20zx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/388161/original/file-20210307-13-17j20zx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/388161/original/file-20210307-13-17j20zx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/388161/original/file-20210307-13-17j20zx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/388161/original/file-20210307-13-17j20zx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Joseph E. Stiglitz, professor at Columbia University and winner of the 2001 Nobel Prize for economics, speaks at a World Economic Forum event in 2015. Stiglitz has referred to inflation as ‘that lurking bogeyman that is more fantasy than real threat nowadays’.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/worldeconomicforum/16808449923/in/photolist-rBiGyK-rBiVZc-sgEf7c-pAaodH-piWQUs-sy5Xit-evKa7Y-7x9W4t-rB8ahs-sgwmsd-8FvMDN-iznPD7-evG1Li-bjf6Ax-8pn68e-7ikFzt-8pqeP9-7ikFq6-wgd3pJ-czsSKm-izp5UL-8pn8AB-5Adqyd-auKxHN-9gm9Zx-4vMh8G-jrCx26-7FM4oz-dPrjdv-7ikFAp-8pqcKj-dPwWwS-jsWsy9-jsWsJu-8pqatC-doxFtA-kL8EWR-azsEDH-MZic3-c9dhQ7-kLa4UJ-kLa4RN-5RbiWf-5Aggeg-evSsYf-c9gmuQ-ieX2R7-4nRR8j-erVGz3-c9fGyu">Benedikt von Loebell/WEF</a></span>
</figcaption>
</figure>
<p>Harvard economist Laurence Summers has <a href="https://www.washingtonpost.com/opinions/2021/02/04/larry-summers-biden-covid-stimulus/">asserted</a> that adding Biden’s $1.9 trillion stimulus package to the <a href="https://www.washingtonpost.com/us-policy/2020/10/16/2020-budget-deficit-coronavirus/">$3.1 trillion deficit</a> that the Trump administration ran up in 2020 has the potential to revive inflation “of a kind we have not seen in a generation”. In response, <a href="https://edition.cnn.com/2021/02/23/perspectives/stimulus-biden-covid-relief-joseph-stiglitz/index.html">Stiglitz</a> argues that if inflation rises, the Federal Reserve will simply increase the short-term interest rate as it did in the past. Furthermore, as echoed by proponents of MMT, should inflation return, the government can increase taxes on those with higher incomes.</p>
<h2>A regime shift is under way</h2>
<p>It is enough to read the economic news media to realize that <a href="https://edition.cnn.com/business/markets/commodities">commodity prices</a> are edging up. In particular, at $67 a barrel, oil is now back to the pre-pandemic level, with consequences on transport and energy prices. Combined with shortages of electronic components and spare parts, this is leading to higher production prices (1.3% increase in January from previous month in the <a href="https://www.bls.gov/data/">United States</a>, and 1.4% increase from previous month in the <a href="https://ec.europa.eu/eurostat">EU</a>). In the euro area, deflation of December 2020 (-0.3%) turned into inflation (+0.9%) in January 2021, driven by a <a href="https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp210302%7Eb618d33987.en.html">one-off statistical readjustment</a> of the consumption basket, and the unwinding of the emergency VAT cut in Germany.</p>
<p>In the past, central banks focused on price stability. These days, many appear to be less concerned, as noted by <a href="https://www.bloomberg.com/news/articles/2021-02-26/bank-of-england-s-haldane-sees-risk-of-complacency-on-inflation-klm73ju9">Andrew Haldane</a>, chief economist of the Bank of England. In the United States, the Fed altered its policy in 2020 to allow for a higher than 2% inflation rate until output returns to pre-pandemic levels. </p>
<p>In the euro area, the ECB’s chief economist, Philip Lane, comments that the bank is “closely monitoring” <a href="https://www.reuters.com/article/ecb-policy-lane-idUSL8N2KW163">bond yields</a>. On March 1, the <a href="https://www.bloombergquint.com/global-economics/australia-s-central-bank-stands-pat-after-shock-and-awe-campaign">Australian Central Bank</a> decided to steer its bond purchase program to unravel the increase in long-term yields. Continued support to the bond marked is a wrong signal to send if the original selling movement in bonds is determined by raising inflation expectations.</p>
<p>With a supply shock on the one hand, and governments engaged in massive spending plans and central banks ready to support them by monetizing debts on the other hand, there is little left to keep inflation expectations under control. </p>
<p>Today only a minority of economists, investment firms and policymakers expect inflation to return, but it is an essential, informed minority. Since the beginning of the year, investment fund managers are actively <a href="https://www.ft.com/content/53097c24-b13d-4936-8fd9-01517c862efc?shareType=nongift">hedging against inflation</a>. In his <a href="https://www.ft.com/content/01f308ff-0a66-4c31-9653-a9c81d940b23">February 26 letter to investors</a>, Warren Buffet recommended avoiding the bond market, where rising inflation expectation should entail bigger losses. He was correct in 2001 and 2008, and he could well be correct now.</p><img src="https://counter.theconversation.com/content/156335/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Les auteurs ne travaillent pas, ne conseillent pas, ne possèdent pas de parts, ne reçoivent pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'ont déclaré aucune autre affiliation que leur organisme de recherche.</span></em></p>Massive stimulus plans combined with rising production costs could lead to expectations that inflation will rise. And that alone could trigger an inflationary spiral not seen in 25 years.Radu Vranceanu, Professeur d'économie, ESSEC Marc Guyot, Professeur d'économie, ESSEC Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1471092020-10-13T13:36:46Z2020-10-13T13:36:46ZZimbabwe’s restrictions on mobile money transfers are a blow to financial inclusion<figure><img src="https://images.theconversation.com/files/363345/original/file-20201014-15-zrgscb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A closed mobile money kiosk in Harare. Up to 50,000 small agents are affected countrywide.
</span> <span class="attribution"><span class="source">Tampiwa Mahari/Great Gatsby Photography</span></span></figcaption></figure><p>Mobile financial services are, in most African countries, born out of <a href="https://blogs.worldbank.org/voices/expanding-digital-financial-services-can-help-developing-economies-cope-crisis-now-and-boost-growth-later">crises</a>. In 2011, Zimbabwe had gone through a volatile decade of economic crises – hyperinflation, currency instability and a collapse of the formal financial system. Consumers, mostly employed in the informal sector, had a widespread mistrust of the formal banking system.</p>
<p>In came Econet, a major mobile operator, to launch a mobile money service called Ecocash. Taking advantage of the country’s high mobile penetration, the service had 2.3 million users within 18 months. Today, <a href="https://nextbillion.net/how-mobile-airtime-vendor-became-fastest-growing-bank/">close to 90% of adult Zimbabweans</a> use Ecocash. In addition, Ecocash paved the way for competitors such as OneMoney, Telecash and Mycash. </p>
<p>The economic crisis in Zimbabwe spurred the rapid adoption and use of mobile money. First came <a href="https://www.bbc.com/news/world-africa-45822166">cash shortages</a> coupled with higher cash withdrawal fees and lower withdrawal limits. Then loss of savings to soaring inflation and loan denials in the formal banking system engendered mistrust among consumers. This forced a government-led drive towards a cashless economy and <a href="https://qz.com/africa/1212021/zimbabwe-wants-mobile-money-interoperability-for-econet-others-as-cash-crunch-bites/">non-cash transactions</a>. </p>
<p>Mobile money transfers in Zimbabwe are mainly from one person to another. This allows for urban to rural money remittances for family support, payment for goods and services in retail settings and financial flows between the formal and informal business sectors. Another important use of mobile money is to store money securely in high crime areas. </p>
<p>An important benefit is the <a href="https://qz.com/africa/1719085/zimbabwe-shuts-down-mobile-money-cash-options-with-ecocash/">cash-in and cash-out functionality</a>. This allows users to deposit cash into a mobile account through a mobile money agent and withdraw physical cash at a convenient time and place. They can avoid the long queues and withdrawal limits set by the formal banking system. </p>
<p>Despite the compelling value proposition that mobile money offers, the Reserve Bank of Zimbabwe recently <a href="https://www.rbz.co.zw/documents/mps/2020/MPS--MID-TERM.pdf">placed significant regulatory restrictions</a> on its operations. The regulator said mobile money services were fuelling illegal foreign currency exchange, money laundering and fraud, especially through the cash-in/cash-out service.</p>
<p>The restrictions followed the Reserve Bank’s audit of the four mobile money platforms, including Ecocash. It found that some accounts were opened using fictitious or unverified identification documents. There was also a rampant misuse of mobile money accounts for <a href="https://www.rbz.co.zw/documents/mps/2020/MPS--MID-TERM.pdf">money laundering schemes and fraudulent overdrafts or fictitious credit</a>. It also cited cases of foreign currency trading outside the formal channels.</p>
<p>Users are now restricted to just one mobile wallet account per person and a daily transfer limit of ZW$5,000 (US$50). In addition, users can no longer transact through mobile money agents. Their operations have been abolished. </p>
<p>As a result, close to <a href="https://www.techzim.co.zw/2020/08/agent-lines-banned-by-rbz-as-they-no-longer-serve-any-legitimate-purpose/">50,000 mobile money agents</a> have lost their source of income. This is likely to affect customers in the rural areas of Zimbabwe who depended on the agents to access mobile money services. These agents gave rural consumers the opportunity to be integrated into the financial system.</p>
<p>The overall effect is that mobile money accounts can only be used for transacting but not “store of value” purposes. Store of value means savings or investment accounts. This is seemingly at odds with <a href="https://voxeu.org/article/economics-mobile-money">findings</a> by academics and development practitioners that mobile money accounts encourage poor customers who are not well served by the formal financial sector to save regularly.</p>
<p>This is all the more so in a country battling with a shortage of banknotes and coins and the <a href="https://www.bbc.com/news/world-africa-45822166">collapse of the traditional financial system</a>. The stringent restrictions could stifle innovation among mobile money operators and hinder access to financial services for many unbanked Zimbabweans.</p>
<h2>Alternative approaches</h2>
<p>The blanket restrictions may have the unintended consequence of excluding legitimate merchants and consumers from accessing financial services. The new regulations also appear out of proportion to the risk. For instance, a <a href="https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2018/09/GSMA-Mobile-Money-Policy-Handbook-2018.pdf">tiered approach</a> to know-your-customer regulation could have allowed the regulator to distinguish between risky high-value transactions and low-value transactions.</p>
<p>Zimbabwe has a national population registration system which is only accessible by authorised government workers. The ordinary mobile money agent would not have access to it. But customers without adequate identification could still sign up for a basic account with low transaction and withdrawal limits, instead of being excluded entirely from the financial system. </p>
<p>Alternative forms of identification could have been used for opening accounts. These could include utility bills or letters from local church and village leaders. </p>
<p>The mobile money agent network increased access to financial services in rural and hard-to-reach areas of Zimbabwe. Instead of abolishing the role of mobile money agents, the financial regulator could have reprimanded and fined agents found guilty of money laundering and the trading of foreign exchange without a licence. </p>
<p>The Reserve Bank also needs a financial sector policy that facilitates the development of safe and accessible mobile money services for Zimbabweans who currently don’t have access to financial services. This would require that all stakeholders, including the regulator, mobile money operators, telecommunication regulators and financial intelligence authorities, develop a collaborative regulatory framework. </p>
<p>Such a framework would seek to protect the integrity of the financial system from fraud and misuse. At the same time it would ensure that consumers and merchants enjoyed the full benefits of mobile money services. At all times, the end goal of greater financial inclusion must remain a priority.</p><img src="https://counter.theconversation.com/content/147109/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Marcia Kwaramba does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Stringent restrictions could stifle innovation among mobile money operators and hinder access to financial services.Marcia Kwaramba, Scholar-in-Residence in the Social Responsibility and Sustainability Division, University of Colorado BoulderLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1350662020-04-12T14:04:15Z2020-04-12T14:04:15ZZimbabwe’s shattered economy poses a serious challenge to fighting COVID-19<figure><img src="https://images.theconversation.com/files/326155/original/file-20200407-85423-12r0p9p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Hawkers' stalls in Harare, Zimbabwe, lie deserted following lockdown in a bid to slow down the spread of the coronavirus.
</span> <span class="attribution"><span class="source">EFE-EPA/Aaron Ufumeli</span></span></figcaption></figure><p>The COVID-19 pandemic has left Zimbabwe in an extremely difficult situation. As of early April, the number of infections and deaths from the pandemic <a href="https://www.herald.co.zw/zim-records-3rd-coronavirus-death/">appeared low</a>, although the available data isn’t necessarily reliable. </p>
<p>President Emmerson Mnangagwa <a href="https://www.newzimbabwe.com/breaking-mnangagwa-decrees-21-day-covid-19-lockdown-starting-monday/">announced</a> a 21-day lockdown which began on 30 March, in a bid to contain the spread of the coronavirus. The decree ordered all citizens to stay at home, “except in respect of essential movements related to seeking health services, the purchase of food”, or carrying out responsibilities that are in the critical services sectors. </p>
<p>Other measures include the shutting down of public markets in the informal sector, except those that sell food. </p>
<p>None of this will be easy to implement in Zimbabwe.</p>
<p>The country has an economic profile similar to that of many developing countries. The difference is that its informal sector makes up a much higher percentage of the overall economy. According to a 2018 International Monetary Fund report, Zimbabwe’s informal economy is <a href="https://www.imf.org/en/Publications/WP/Issues/2018/01/25/Shadow-Economies-Around-the-World-What-Did-We-Learn-Over-the-Last-20-Years-45583">the largest in Africa</a>, and second only to Bolivia in the world. The sector accounts for at least 60% of all of Zimbabwe’s economic activity. </p>
<p>In addition to the usual problems faced by countries with large informal economies, including poor governance and low tax revenues, Zimbabwe has an added set of problems: its economy is broken.</p>
<p>To implement the nationwide <a href="https://www.newzimbabwe.com/breaking-mnangagwa-decrees-21-day-covid-19-lockdown-starting-monday/">lockdown</a> Mnangagwa is likely to have to inflict further damage to an already extremely fragile economy. </p>
<p>The president did not announce a stimulus financial package to cushion business from the impact of the lockdown. This might result in the total collapse of some businesses. </p>
<h2>Fragile economy</h2>
<p>Zimbabwe’s economy has been shrinking since <a href="https://www.afdb.org/fileadmin/uploads/afdb/Documents/Generic-Documents/3.%20Zimbabwe%20Report_Chapter%201.pdf">2000</a>, triggered by the government’s controversial land <a href="https://www.fin24.com/Opinion/5-lessons-sa-can-learn-from-zim-land-grabs-20180305-2">re-distribution programme</a> of that year. The violent programme wreaked havoc on agriculture, which was then the mainstay of the Zimbabwean economy. </p>
<p>This was compounded by subsequent sanctions imposed by the West in response to the <a href="http://www.thethinker.co.za/resources/Thinker_81/81%20chagonda.pdf">seizures of white-owned farms and land</a>. </p>
<p>Around <a href="https://www.cnbc.com/2020/03/03/zimbabwe-in-economic-and-humanitarian-crisis-as-imf-sounds-alarm.html">6 million Zimbabweans</a> – about 34% of the population – live in extreme poverty.</p>
<p>The IMF recently gave a very bleak <a href="https://www.imf.org/en/News/Articles/2020/02/26/pr2072-zimbabwe-imf-executive-board-concludes-2020-article-iv-consultation">assessment</a>, saying that the country’s economy had contracted by 7.5% in 2019. It put the inflation rate at over 500%, meaning that the country was heading back to the traumatic hyper-inflation era of <a href="https://www.cnbc.com/2020/03/03/zimbabwe-in-economic-and-humanitarian-crisis-as-imf-sounds-alarm.html">2007/8</a>, when inflation peaked at an official <a href="https://www.economicshelp.org/blog/390/inflation/hyper-inflation-in-zimbabwe/">231 million percent</a>.</p>
<p>The IMF report shows that Zimbabwe’s economy performed the worst in sub-Saharan Africa in 2019. Its prognosis is disheartening, showing that if </p>
<blockquote>
<p>…governance, and corruption challenges, entrenched vested interests, and enforcement of the rule of law, (were not observed) then…there is little prospect of a major improvement to Zimbabwe’s economic and financial challenges in the <a href="https://www.cnbc.com/2020/03/03/zimbabwe-in-economic-and-humanitarian-crisis-as-imf-sounds-alarm.html">short to medium term …</a>. </p>
</blockquote>
<p>The dire economic situation is further worsened by the fact that the country is suffering its <a href="https://www.cnbc.com/2020/03/03/zimbabwe-in-economic-and-humanitarian-crisis-as-imf-sounds-alarm.html">worst hunger crisis in a decade</a>, largely due to an ongoing drought that started last year. The shortage of essential foods, such as the staple maize meal, often results in stampedes at the few <a href="https://www.zimbabwesituation.com/news/millers-avail-40-000t-maize-for-roller-meal/">markets</a> where they can still be found. </p>
<h2>Zimbabwe’s informal sector</h2>
<p>Two decades of economic turmoil have seen Zimbabwe’s formal economic sector shrinking significantly. For example, manufacturing, clothing and textile industries have almost totally collapsed, with factories reduced to <a href="https://set.odi.org/wp-content/uploads/2017/08/SET-Outlook-for-Zimbabwe-Economy_Sep2017.pdf">dilapidated shells</a>.</p>
<p>The consequence is that the informal sector has grown exponentially. It’s estimated that a staggering 90% of Zimbabwe’s working population is <a href="https://set.odi.org/wp-content/uploads/2017/08/SET-Outlook-for-Zimbabwe-Economy_Sep2017.pdf">employed in this sector</a>. </p>
<p>I have been doing <a href="https://scholar.google.co.za/citations?user=sQSjKP0AAAAJ&hl=en">research</a> on Zimbabwe’s informal sector for the last 12 years. I have found that it sustains many families’ livelihoods, even though the majority of participants in the sector live from hand to mouth as petty traders. This reality that confronts Zimbabwe’s informal economy is corroborated by <a href="https://library.fes.de/pdf-files/bueros/simbabwe/13714.pdf">research</a> by the Labour and Economic Development Research Institute of Zimbabwe. </p>
<p>In addition, almost everyone who is employed in the formal economy augments their income through informal sector activities such as <a href="https://scholar.google.co.za/citations?user=sQSjKP0AAAAJ&hl=en">cross-border trading</a>.</p>
<p>Reliable numbers are hard to come by, but a very high number of Zimbabweans <a href="https://www.aljazeera.com/ajimpact/zimbabwe-economy-founders-millennials-eke-living-190910134415766.html">eke out a living in this sector</a>, or rely on it for food, clothing, fuel, local currency and forex. </p>
<h2>Stern test</h2>
<p>The lockdown in Zimbabwe is going to provide a stern test for its informal economy, which is the country’s dominant economy. Most traders are subsistence traders and are already mired in extreme poverty. The jury is out on the extent to which they will observe the lockdown. </p>
<p>The government should immediately put in place a stimulus package that can cushion the informal economy. </p>
<p>Otherwise, a lot of livelihoods are going to be destroyed. The ramifications for the country and the whole region, especially neighbouring South Africa, will be grim.</p>
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Read more:
<a href="https://theconversation.com/zimbabwes-deepening-crisis-time-for-second-government-of-national-unity-122726">Zimbabwe’s deepening crisis: time for second government of national unity?</a>
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<img src="https://counter.theconversation.com/content/135066/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tapiwa Chagonda has previously received funding from the National Research Foundation (NRF). </span></em></p>The current lockdown in Zimbabwe is going to provide a stern test for its informal economy, which is the country’s dominant economy and employs 90% of people.Tapiwa Chagonda, Associate Professor of Sociology, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1215962019-09-06T09:08:13Z2019-09-06T09:08:13ZRobert Gabriel Mugabe: a man whose list of failures is legion<figure><img src="https://images.theconversation.com/files/287334/original/file-20190808-144862-11u42pa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Robert Mugabe, former President of Zimbabwe, addressing media in Harare, in July 2018.</span> <span class="attribution"><span class="source">EPA-EFE/Yeshiel Panchia</span></span></figcaption></figure><p>One wishes one could say “rest in peace”. One can only say, “may there be more peace for Zimbabwe’s people, now that <a href="https://www.sahistory.org.za/people/robert-mugabe">Robert Gabriel Mugabe</a> has retired permanently”. Zimbabwe’s former president <a href="https://theconversation.com/robert-mugabe-as-divisive-in-death-as-he-was-in-life-108103">has died</a>, aged 95.</p>
<p>His failures are legion. They might start with the 1980s Gukurahundi massacres in Matabeleland and the Midlands, with perhaps <a href="https://www.sithatha.com/books">20 000 people killed</a>. Next, too much welfare spending <a href="http://weaverpresszimbabwe.com/reviews/59-becoming-zimbabwe?start=10">in the 1980s</a>. Then crudely implemented <a href="https://www.researchgate.net/publication/289336044_The_Economic_Structural_Adjustment_Programme_The_Case_of_Zimbabwe_1990-1995">structural adjustment programmes</a> in the 1990s, laying the ground for angry war veterans and the Movement for Democratic Change (MDC), a strong labour union and civil society based opposition party.</p>
<p>In 1997 Mugabe handed out unbudgeted pensions to the war-vets and promised to really start the “fast track land reform” that got going <a href="https://www.researchgate.net/publication/287199114_The_impact_of_land_reform_in_Zimbabwe_on_the_conservation_of_cheetahs_and_other_large_carnivores">in 2000</a>, when the MDC threatened to defeat Zanu (PF) at the polls. That abrogation of property rights started the slide in the Zimbabwean dollar’s value.</p>
<p>From 1998 to 2003 Zimbabwe’s participation in the Democratic Republic of the Congo’s second war cost US$1 million a day, creating a military cabal used to getting money fast. Speedy money printing presses led to <a href="https://www.sahistory.org.za/sites/default/files/file%20uploads%20/hany_besada_zimbabwe_picking_up_the_piecesbook4you.pdf">unfathomable hyperinflation</a> and the end of Zimbabwe’s sovereign currency, still the albatross around the country’s <a href="https://www.bbc.com/news/world-africa-48757080">neck</a>. </p>
<p>In 2008, the MDC’s electoral victory was reversed with a presidential run-off when at least 170 opposition supporters were murdered. Hundreds more were beaten and <a href="http://archive.kubatana.net/docs/elec/rau_critique_zec_elec_report_090612.pdf">chased from their homes</a>. Even Mugabe’s regional support base could not stand for that, so he was forced to accept a <a href="https://africanarguments.org/2013/07/15/review-the-hard-road-to-reform-the-politics-of-zimbabwes-global-political-agreement-reviewed-by-timothy-scarnecchia/">transitional inclusive government</a> with the MDC.</p>
<p>Over the next decade, Mugabe was unable to stop his party’s increasing faction fighting. His years of playing one group off against the other to favour himself <a href="https://ora.ox.ac.uk/objects/uuid:f05aec20-6d98-425a-8d82-56688ea93246/download_file?file_format=pdf&safe_filename=State%2Bintelligence%2Band%2Bthe%2Bpolitics%2Bof%2BZimbabwe%2527s%2Bpresidential%2Bsuccession.pdf&type_of_work=Journal+article">finally wore too thin</a>. When in early November 2017, at his wife Grace’s instigation, he fired his long-time lapdog Vice-President Emmerson Mnangagwa, the generals with whom he’d colluded for decades turned on him. A <em>coup petit</em> ensued and returned Mnangagwa from exile, soon to be elevated to the presidency and heavily indebted to his comrades.</p>
<p>Where did Mugabe gain his proclivity for factionalism? And how did he learn to speak the language all wanted to hear – only to make them realise they had been deluded in the end? </p>
<h2>The beginning</h2>
<p>Mugabe and many other Zimbabwean nationalists were jailed in 1964. Ian Smith was preparing for the Unilateral Declaration of Independence, and the first nationalist party had split into Joshua Nkomo’s Zimbabwe African People’s Union and Ndabaningi Sithole’s Zanu. Mugabe had been Nkomo’s Publicity Secretary. </p>
<p>As far back as 1962, Mugabe was registering on the global scales: Salisbury’s resident British diplomat <a href="https://www.palgrave.com/de/book/9781137543448#aboutAuthors">thought Mugabe was</a> “a sinister figure” heading up a youthful “Zimbabwean Liberation Army … the more extreme wing of Zapu”. </p>
<p>But almost as soon as Mugabe was imprisoned, a man in her majesty’s employ travelled down from his advisory post in newly free Zambia to visit the prisoner. Dennis Grennan returned to Lusaka having <a href="http://archive.kubatana.net/html/archive/opin/080120dm.asp?sector=OPIN&year=2008&range_start=571">promised</a> to look after Mugabe’s wife Sarah, known as “Sally”. Grennan and people like Julius Nyerere’s British friend and assistant <a href="https://www.jstor.org/stable/pdf/3518465.pdf?refreqid=excelsior%3A4d7659d7e9f1b2a3dd3124c9a249a47c">Joan Wicken</a> played an important role in Mugabe’s rise. </p>
<p>The Zimbabwean nationalists emerged from Salisbury’s prisons late in 1974, as Portugal’s coup led to Angola and Mozambique emerging from colonialism into the Soviet orbit. The fifties generation of Zimbabwean nationalists were to participate in the Zambian and South African inspired détente <a href="https://www.nytimes.com/1975/03/25/archives/mr-vorsters-detente.html">exercise</a>. This inspired much competition for Zanu’s leadership: Mugabe arrived in Lusaka after ousting Ndabaningi Sithole, Zanu’s first leader. </p>
<p>Samora Machel, freshly in Mozambique’s top office, wondered if Mugabe’s quick rise was due to a <a href="https://www.jstor.org/stable/pdf/40201256.pdf?refreqid=excelsior%3A1d1f7a14b762adff6a6007321af29132">“coup in prison”</a>. Herbert Chitepo’s March 1975 <a href="https://www.jstor.org/stable/pdf/3557400.pdf">assassination </a> (which got many of Zanu’s leaders arrested and its army kicked out of Zambia) was only one marker of the many fissures in the fractious party that by 1980 would rule Zimbabwe.</p>
<p>In late 1975 the <a href="https://www.pindula.co.zw/Vashandi_"><em>vashandi</em></a> group emerged within the Zimbabwean People’s Army. Based in Mozambique’s guerrilla camps, they tried to forge unity between Zimbabwe’s two main nationalist armies and push a left-wing agenda. They were profoundly unsure of Mugabe’s suitability for <a href="https://nehandaradio.com/2016/08/08/heroes-day-review-dzino-memories-freedom-fighter/">leadership</a>.</p>
<p>When Mugabe found his way to Mozambique also in late 1975, Machel put him under house arrest in Quelimane, far from the guerrilla camps. In January Grennan helped him to London to visit a hospitalised Sally. He made contacts around Europe and with a few <a href="https://doi.org/10.1080/03057078008708020">London-based Maoists</a>.</p>
<p>Soon after Mugabe’s return the young American congressman Stephen Solarz and the Deputy Head of the American embassy in Maputo, Johnnie Carson, wended their way to <a href="http://dx.doi.org/10.1080/02589001.2014.956499">Quelimane</a>. Mugabe wowed them.</p>
<p>Solarz and Carson reported back that Mugabe was “an impressive, articulate and extremely confident individual” with a “philosophical approach to problems and … well reasoned arguments”. He claimed to control the “people’s army”. Yet by January 1977, he persuaded Samora Machel to imprison the young advocates of unity with Zapu. His many reasons included their initial refusal to support him at a late 1976 conference in Geneva organised by the British, helped immeasurably by Henry Kissinger, the American Secretary of State. </p>
<p>At a hastily called congress in March 1977 to consecrate his ascension, Mugabe uttered his leitmotif: those appearing to attempt a change to the party’s leadership by “maliciously planting contradictions within our ranks” would be struck by the <a href="http://www.aluka.org/action/showMetadata?doi=10.5555/AL.SFF.DOCUMENT.nuzn197707">“the Zanu axe”</a>.</p>
<p>This was Mugabe’s strategy, embedded at an early stage: tell foreign emissaries what they wanted to hear, use young radicals (or older allies) until their usefulness subsided, and then get rid of them. All the while he would balance the other forces contending for power in the party amid a general climate of fear, distrust, and paranoia. </p>
<h2>Dealing with dissent</h2>
<p>It is not certain if Margaret Thatcher knew about this side of Mugabe when they met less than a month after his April 1980 inauguration. He seemed most worried about how Joshua Nkomo’s Zapu – which he had dumped from the erstwhile “Patriotic Front”, and the violence against which had put Zimbabwe’s election in some doubt – was making life difficult for the new rulers. He <a href="http://dx.doi.org/10.1080/03056244.2016.1214116">warned</a> that he might have “to act against them soon”.</p>
<p>In as much as Zapu was linked with the South African ANC and Thatcher and her colleagues tended to think the ANC was controlled by the South African Communist Party, Zapu intelligence chief <a href="https://theconversation.com/a-tribute-to-zimbabwean-liberation-hero-dumiso-dabengwa-117986">Dumiso Dabengwa’s</a> perspective might be more than conspiracy theory. Perhaps Thatcher’s wink and nudge was a green light for the anti-Soviet contingent to eliminate a regional threat. Gukurahundi <a href="https://dx.doi.org/10.1080/07075332.2017.1309561">followed</a>. It was certainly the biggest blot on Mugabe’s career and created the biggest scar over Zimbabwe. The scar is still there, given the lack of any effort at reconcialitation, truth, or justice.</p>
<p>Four years later the ruling party’s first real congress since 1963 reviewed its history. Mugabe tore the Zipa/Vashandi group that had annoyed him eight years before to shreds. “Treacherous … counter-revolutionary … arms caching … dubbed us all <em>zvigananda</em> or bourgeois”. Thus it “became imperative for us to firmly act against them in defending the Party and the Revolution… We had all the trouble-makers detained”. </p>
<p>The great helmsman recounted the youthful dissenters’ arrest and repeated the axe phraseology. </p>
<p>But few saw these sides of Mugabe’s character soon enough; those who did were summarily shut up. </p>
<h2>The end</h2>
<p>After he’d been ousted, Mugabe could only look on in seeming despair over the ruination he had created. Sanctimonious as ever he wondered how his successor, current President Emmerson Mnangagwa, had become such an ogre. At his 95th birthday, February 21 2019, a few weeks after Mnangagwa’s troops had killed 17 demonstrators, raped as many women, and beaten hundreds more in the wake of his beleaguered finance minister’s methods to create <a href="https://theconversation.com/fantasy-that-mnangagwa-would-fix-zimbabwe-now-fully-exposed-110197">“prosperity from austerity”</a>, Mugabe <a href="https://bulawayo24.com/index-id-news-sc-national-byo-156949.html">mused to his absent successor</a>:</p>
<blockquote>
<p>We condemn the violence on civilians by soldiers … You can’t do without seeing dead bodies? What kind of a person are you? You feed on death? </p>
</blockquote>
<p>He only had to look into his own history to see what kind of people he helped create.</p><img src="https://counter.theconversation.com/content/121596/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David B. Moore does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Robert Mugabe’s years of playing one group off against the other to favour himself finally wore too thin in 2017.David B. Moore, Professor of Development Studies, University of Johannesburg, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1215382019-08-07T17:13:22Z2019-08-07T17:13:22Z5 reasons why Trump’s Venezuela embargo won’t end the Maduro regime<p>The U.S. has <a href="https://www.cnn.com/2019/08/05/politics/trump-economic-embargo-venezuela/index.html">announced</a> an economic embargo on Venezuela, intended to put an end to President Nicolás Maduro’s authoritarian regime. </p>
<p>In an Aug. 5 <a href="https://www.whitehouse.gov/presidential-actions/executive-order-blocking-property-government-venezuela/">executive order</a>, President Donald Trump said that the tough new sanctions – which target any company or individual outside of Venezuela doing business directly or indirectly with Maduro’s government – were a response to the Maduro regime’s “continued usurpation of power” and “human rights abuses.” </p>
<p>All Venezuelan government assets in the United States are also now frozen. </p>
<p>The new measures represent a significant escalation from <a href="https://www.treasury.gov/resource-center/sanctions/programs/pages/venezuela.aspx">previous sanctions</a>, which mainly targeted government officials and some key industries such as oil and gas, gold and finance.</p>
<p>But my <a href="https://theconversation.com/profiles/marco-aponte-moreno-134249">analysis of Venezuela’s political and economic crisis</a> suggests that an embargo alone will not provoke Maduro’s ouster. Here are five reasons why.</p>
<h2>1. Venezuela’s economy is already broken</h2>
<p>Embargos are a <a href="https://www.cfr.org/backgrounder/what-are-economic-sanctions">foreign policy tool</a> meant to pressure rogue governments into changing their ways by cutting off their cash flow.</p>
<p>It’s too late for that in Venezuela. </p>
<p>After years of mismanagement and corruption by the Maduro government, Venezuela’s economy is in <a href="https://theconversation.com/inside-venezuelas-economic-collapse-80597">shambles</a>. The GDP has contracted by <a href="https://www.bbc.com/news/world-latin-america-46999668">more than 15% every year since 2016</a>. Hyperinflation hit <a href="https://www.cnbc.com/2019/08/02/venezuela-inflation-at-10-million-percent-its-time-for-shock-therapy.html">10 million percent</a> in 2019. </p>
<p>Maduro’s cash-strapped government <a href="https://www.forbes.com/sites/francescoppola/2017/11/14/venezuela-defaults/#3806fbe62755">defaulted on its dollar-based bonds</a> in 2017. This year it has <a href="https://www.bloomberg.com/news/articles/2019-06-04/venezuela-is-said-to-default-on-gold-swap-with-deutsche-bank">failed to make payments on US$1.85 billion</a> that Deutsche Bank and Citigroup loaned Venezuela using the regime’s gold as collateral. Venezuela’s government is nearly bankrupt.</p>
<p>But since this economic decline has happened gradually, beginning in 2014, wealthy Venezuelans – especially corrupt government officials – have already <a href="https://www.gazetadopovo.com.br/wiseup-news/who-are-venezuelas-wealthy/">put their money overseas</a>, primarily in European markets. For example, Venezuelans own some <a href="https://www.nytimes.com/2018/07/29/world/europe/spain-property-boom-venezuela.html">7,000 luxury apartments</a> in Madrid, according to The New York Times. </p>
<p>American sanctions just can’t hurt Venezuela’s ruling class the way they might have several years ago.</p>
<h2>2. The embargo leaves some cash flows untouched</h2>
<p>Trump’s harsh new sanctions on Venezuela are not a full trade embargo like the Cuba embargo, which has almost totally <a href="https://insightcuba.com/faq/trade-embargo-cuba">isolated the island from world markets since 1962</a>. </p>
<p>Imports and exports with the private sector – a <a href="https://www.washingtonpost.com/politics/trump-freezes-venezuela-govt-assets-in-escalation/2019/08/05/f8f4dd0a-b7eb-11e9-8e83-4e6687e99814_story.html">still sizable market</a> despite Maduro’s socialist policies – will continue to flow freely, as will remittances from Venezuelans living abroad. </p>
<p>These two income sources both come in dollars, which is far more stable and valuable than the local currency. Combined, they can keep the ailing Venezuelan economy afloat for some time. </p>
<p>An incomplete embargo, in other words, will not provoke complete economic collapse. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/287182/original/file-20190807-144878-1a84vcw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/287182/original/file-20190807-144878-1a84vcw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/287182/original/file-20190807-144878-1a84vcw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/287182/original/file-20190807-144878-1a84vcw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/287182/original/file-20190807-144878-1a84vcw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/287182/original/file-20190807-144878-1a84vcw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/287182/original/file-20190807-144878-1a84vcw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/287182/original/file-20190807-144878-1a84vcw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The U.S. embargo is sure to be unpopular in Venezuela. A wall in Caracas reads, ‘Trump, un-embargo Venezuela.’</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Venezuela-Executive-Order/6010ad273b83495897ff4d528ae3b38d/5/0">AP Photo/Leonardo Fernandez</a></span>
</figcaption>
</figure>
<h2>3. The poor, not the regime, will be hurt the most</h2>
<p>Venezuelans with <a href="https://www.theguardian.com/world/2019/mar/13/venezuela-hyperinflation-bolivar-banknotes-dollars">access to dollars</a> – through remittances or savings squirreled away before the crisis – are surviving this crisis. They can afford food, medicine and gasoline, and buy other goods to barter. </p>
<p>But most Venezuelans today are desperately poor. According to the United Nations, <a href="https://borgenproject.org/top-10-facts-about-poverty-in-venezuela/">90% of people there live in poverty</a>. That’s double what it was in 2014.</p>
<p>The Venezuelan minimum wage of roughly $7 per month is not enough to cover a family’s basic needs. As a result, malnutrition is spreading. Last year, Venezuelans reported <a href="https://borgenproject.org/top-10-facts-about-poverty-in-venezuela/">losing an average of 25 pounds</a>, and two-thirds said they <a href="https://borgenproject.org/top-10-facts-about-poverty-in-venezuela/">go to bed hungry</a>.</p>
<p>The majority of Venezuelans rely on the government to eat. Its monthly <a href="https://www.reuters.com/article/us-venezuela-politics-food/for-poor-venezuelans-a-box-of-food-may-sway-vote-for-maduro-idUSKCN1GO173">delivery of heavily subsidized food and basic goods</a> known as “CLAP” is a lifeline to the poor. If the government runs out of money, poor people will feel it the most – not the government officials and other Venezuelans with <a href="https://www.theguardian.com/world/2019/mar/13/venezuela-hyperinflation-bolivar-banknotes-dollars">access to dollars</a>. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/287109/original/file-20190806-84225-1pk34ph.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/287109/original/file-20190806-84225-1pk34ph.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/287109/original/file-20190806-84225-1pk34ph.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/287109/original/file-20190806-84225-1pk34ph.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/287109/original/file-20190806-84225-1pk34ph.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/287109/original/file-20190806-84225-1pk34ph.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/287109/original/file-20190806-84225-1pk34ph.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Venezuelan National Militia members carry boxes of subsidized food for distribution across the capital of Caracas, July 5, 2019.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Venezuela-Independence-Day/83058532fb664fe88fe46bd1f2507378/2/0">AP Photos/Ariana Cubillos</a></span>
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</figure>
<h2>4. China and Russia still support Venezuela</h2>
<p>Maduro has few international allies. When the Trump administration led efforts earlier this year to <a href="https://theconversation.com/venezuela-power-struggle-plunges-nation-into-turmoil-3-essential-reads-110419">recognize opposition leader Juan Guaidó as the legitimate president of Venezuela</a>, 60 countries joined it.</p>
<p>But China and Russia continue to be the Venezuela’s most powerful international boosters and have bailed out Maduro by giving his government <a href="https://www.washingtonpost.com/politics/2019/02/22/china-russia-have-deep-financial-ties-venezuela-heres-whats-stake/">massive loans</a> in the past. Both have <a href="https://www.euronews.com/2019/02/28/watch-live-un-security-council-votes-on-rival-us-russian-proposals-on-venezuela">vetoed every U.S. effort to pass resolutions against Maduro’s government</a> within the United Nations. </p>
<p>China has exploited <a href="https://www.washingtonpost.com/politics/2019/02/22/china-russia-have-deep-financial-ties-venezuela-heres-whats-stake/">Venezuela’s vast natural resources</a> for profit. Russia has made the South American nation a strategic geopolitical partner in the Western Hemisphere, a key ally in its <a href="https://www.nytimes.com/2019/03/08/world/americas/russia-venezuela-maduro-putin.html">efforts to undermine American influence</a>. </p>
<p>Neither of the two countries are likely to comply with an economic embargo to Venezuela. Analysts expect them to <a href="https://www.miamiherald.com/news/nation-world/world/americas/venezuela/article233590982.html">continue buying oil, gold</a> and other valuable commodities from Maduro’s regime, providing much-needed cash to his government.</p>
<h2>5. Remember Cuba?</h2>
<p>Embargoes rarely produce regime change of the sort Trump seeks in Venezuela. </p>
<p>Just consider Cuba, which this year celebrated the 66th anniversary of its communist revolution – 57 years after the Kennedy government imposed a <a href="https://www.treasury.gov/resource-center/sanctions/programs/pages/cuba.aspx">trade embargo against it</a>. The Cuba embargo didn’t end the Castro regime; it fueled anti-American sentiment, handing the Castros an easy scapegoat for all the country’s problems – thereby <a href="https://www.nationalgeographic.com/news/2014/12/141217-cuba-united-states-relations-culture-reaction-castro-obama-world/">improving the government’s own popularity</a>.</p>
<p>An embargo will almost surely do the same in Venezuela. Trump has given Maduro even <a href="https://www.forbes.com/sites/kenrapoza/2019/02/15/maduro-blames-trump-for-venezuelas-great-depression/">more ammunition to blame the U.S.</a> for his country’s economic woes. </p>
<p>Maduro has been <a href="https://www.nytimes.com/2015/03/12/world/americas/venezuela-nicolas-maduro-obama.html">doing that for years</a> anyway. Now, he won’t be totally wrong.</p><img src="https://counter.theconversation.com/content/121538/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Marco Aponte-Moreno does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>For one, you can’t break an economy that’s already broken.Marco Aponte-Moreno, Associate Professor of Global Business and Board Member of the Institute for Latino and Latin American Studies, St Mary's College of California Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1129902019-03-06T11:25:39Z2019-03-06T11:25:39ZVenezuela’s economic collapse is laid bare when you look at how little energy the country is consuming<p>The country with the <a href="https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-stats-review-2018-full-report.pdf">most oil reserves</a> on the planet is facing a total economic crash, with wildly conflicting inflation estimates – <a href="https://www.imf.org/external/datamapper/PCPIPCH@WEO/WEOWORLD/VEN">as high as 10,000,000%</a> if the IMF’s projections for this year are correct. There has been much discussion about the collapse in Venezuela’s oil exports, intensified by <a href="https://edition.cnn.com/2019/02/19/investing/venezuela-oil-sanctions-pdvsa/index.html">US sanctions</a> against <a href="https://www.bloomberg.com/news/articles/2019-02-25/half-billion-dollars-of-sanction-stained-oil-sits-off-venezuela">the state oil</a> company PDVSA, which substantially prevents any oil trading between the two countries and takes away a steady income stream for the country. To understand the scale of the crisis, however, it is vital to look at what has been happening to energy consumption inside the country itself. </p>
<p>Oil consumption in Venezuela <a href="https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html">fell 37%</a> in five years up to 2017, a reminder that the country was struggling under the Maduro administration long before the latest sanctions, which came after opposition leader Juan Guaidó <a href="https://theconversation.com/maduro-has-pushed-venezuela-to-the-brink-of-revolution-sanctions-and-aid-may-tip-it-over-the-edge-112324">announced himself</a> the country’s rightful president in January. Unfortunately, the oil decline is not an environmental achievement but a worrying symptom of Venezuela’s economic conditions – GDP is <a href="https://blogs.imf.org/2019/01/25/latin-america-and-the-caribbean-in-2019-a-moderate-expansion/">expected</a> to have fallen 50% between 2015 and 2019. </p>
<p>In a country where economic data is scarce, different oil products can be used as proxies for different kinds of economic activity. Venezuela’s oil and fuel oil export numbers give insights into the country’s incoming cash flow from abroad, for instance, while diesel consumption is a partial indicator for transport, industry and the power sector. Gasoline is a proxy for transport activity as well. </p>
<p>Diesel consumption declined by 11% on average each year in 2013-17, and gasoline shows a similar pattern with an average annual decline of 7% or by 27% over the same five-year period. Together, the two fuels account for approximately 70% of total oil demand in the country. From the graphic below, you can see that the collapse in oil consumption and GDP are staggeringly similar. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/262200/original/file-20190305-48426-2q6uku.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/262200/original/file-20190305-48426-2q6uku.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/262200/original/file-20190305-48426-2q6uku.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=436&fit=crop&dpr=1 600w, https://images.theconversation.com/files/262200/original/file-20190305-48426-2q6uku.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=436&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/262200/original/file-20190305-48426-2q6uku.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=436&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/262200/original/file-20190305-48426-2q6uku.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=548&fit=crop&dpr=1 754w, https://images.theconversation.com/files/262200/original/file-20190305-48426-2q6uku.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=548&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/262200/original/file-20190305-48426-2q6uku.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=548&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">ppp = purchasing power parity; MT = millions of tonnes; GDP from IMF.</span>
<span class="attribution"><span class="source">BP Statistical Review 2018</span></span>
</figcaption>
</figure>
<p>This is not to say that the oil consumption estimates from the likes of BP are anywhere near perfect. Multiple Venezuelan official energy statistics ceased to be published between 2012 and 2015, leaving experts to build the best possible estimates from multiple sources. </p>
<p>BP figures for total oil consumption have been consistently revised downwards every year in recent history, as reality always punches below expectations. You can see this in the following graph, where each coloured line represents a different year of the BP Statistical Review and the estimates included for Venezuelan oil consumption: the yellow line represents the 2018 edition, whose numbers are mostly lower than the estimates in previous years’ editions. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/262195/original/file-20190305-48438-jp936a.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/262195/original/file-20190305-48438-jp936a.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/262195/original/file-20190305-48438-jp936a.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=436&fit=crop&dpr=1 600w, https://images.theconversation.com/files/262195/original/file-20190305-48438-jp936a.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=436&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/262195/original/file-20190305-48438-jp936a.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=436&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/262195/original/file-20190305-48438-jp936a.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=548&fit=crop&dpr=1 754w, https://images.theconversation.com/files/262195/original/file-20190305-48438-jp936a.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=548&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/262195/original/file-20190305-48438-jp936a.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=548&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">SR = BP Statistical Review of World Energy; MT = millions of tonnes.</span>
<span class="attribution"><span class="source">BP Statistical Reviews 2015-18</span></span>
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</figure>
<h2>The view from the ground</h2>
<p>People are not driving around anymore in Venezuela. To make things worse, 90% of buses were <a href="https://venezuelablog.org/venezuelas-public-transportation-crisis/">reportedly</a> out of action by mid-2018. This is a society that just doesn’t go out for work or travel. Businesses are also using less transportation, since they produce fewer goods than they used to – including food. The last implication is terrifying, and can easily be missed when solely looking at numbers. It is possible to survive without a car, but not without food. A litre of milk <a href="https://venezuelablog.org/venezuelas-public-transportation-crisis/">can now easily cost</a> a tenth of a monthly salary. </p>
<p>Energy prices have been severely distorted by a combination of explosive inflation and heavy fuel subsidies. By mid-2018, <a href="https://www.theguardian.com/world/2018/aug/10/venezuela-crisis-fuel-driving-census-maduro">you could buy</a> 3.5m litres of gasoline for a single US dollar, but could barely buy any basic food item. Yet even if you have enough money to fill up your tank, it is increasingly difficult to find fuel – and the cost of spare parts is exorbitant. </p>
<p>The future of oil output looks equally bleak. <a href="https://fas.org/sgp/crs/row/IF10715.pdf">Production</a> is quickly <a href="https://www.bloomberg.com/graphics/2018-venezuela-oil/">collapsing</a>, with refineries only running at an incredibly low 22% of capacity. The power system is actually taking a double hit: the part that depends on fossil fuels in the form of natural gas, diesel and some fuel oil is crumbling while the part driven by hydropower is being <a href="https://www.scientificamerican.com/article/where-climate-change-fits-into-venezuela-rsquo-s-ongoing-crisis/">undermined by</a> very low rainfall caused by changing climate patterns. The net result <a href="https://www.miamiherald.com/latest-news/article220464510.html">has been</a> thousands of power failures. A dry year could aggravate things further, requiring extra fossil fuels that the country is incapable of producing or affording. </p>
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Read more:
<a href="https://theconversation.com/venezuela-us-sanctions-hurt-but-the-economic-crisis-is-home-grown-111280">Venezuela: US sanctions hurt, but the economic crisis is home grown</a>
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<p>As the sanctions continue to bite and hyperinflation rages on, Venezuela’s oil consumption decline looks set to reach levels last seen in the 1990s. The country began <a href="https://www.spglobal.com/platts/en/market-insights/latest-news/oil/020419-venezuelas-pdvsa-begins-partial-rationing-of-gasoline-sources">rationing gasoline</a> in February, and is now in the awkward position of <a href="https://www.reuters.com/article/us-venezuela-politics-oil-supplies/venezuela-gets-fuel-from-russia-europe-but-the-bill-soars-idUSKCN1QA0H9">importing</a> refined fuels from Russia, India and Spain at “horrifying” premiums, according to an executive of PDVSA. One consequence of the sanctions is that they have affected Venezuela’s ability to transport heavy oil from its own oil fields, since this is made easier by adding diluting agents that are <a href="https://www.reuters.com/article/us-venezuela-politics-usa-sanctions-fact/factbox-u-s-sanctions-on-venezuelas-oil-industry-idUSKCN1PN34I">often imported</a> from the US. </p>
<p>The perfect storm of sanctions, inflation, production problems and <a href="https://www.scientificamerican.com/article/where-climate-change-fits-into-venezuela-rsquo-s-ongoing-crisis/">climate change risks</a> to power supply leaves us wondering how long it might take before the energy system comes to a total halt. As new oil statistics are published in the coming months, everyone from energy analysts to Washington policy hawks will be poring over them to try and understand where the country goes from here.</p><img src="https://counter.theconversation.com/content/112990/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>António Carvalho collaborates with BP for the Statistical Review of World Energy and Energy Outlook, but the views expressed here are his own. </span></em></p><p class="fine-print"><em><span>Jan Ditzen collaborates with BP for the Statistical Review of World Energy and Energy Outlook, but the views expressed here are his own. </span></em></p>The world’s most oil-abundant nation is heading for energy consumption levels not seen since the 1990s.António Carvalho, Research Associate (Centre for Energy Economics Research and Policy), Heriot-Watt UniversityJan Ditzen, Research Associate (Centre for Energy Economics Research and Policy), Heriot-Watt UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1024832019-02-05T19:10:47Z2019-02-05T19:10:47ZWhat caused hyperinflation in Venezuela: a rare blend of public ineptitude and private enterprise<p>Imagine going to the store and finding that nothing has a price tag on it. Instead you take it to the cashier and they calculate the price. What you pay could be twice as much, or more, than an hour earlier. That’s if there is even anything left in stock. </p>
<p>This is the economic reality that underpins Venezuela’s current “political crisis” – though in truth that crisis has been going on for years. </p>
<p>The government headed by Nicolás Maduro, who has presided over Venezuela since 2013, declared a state of emergency in 2016. That year the inflation rate hit 800%. Things have since gone from bad to worse. </p>
<p>By 2018 inflation was an estimated 80,000%. It’s difficult to say what the rate is now, but Bloomberg’s <a href="https://www.bloomberg.com/features/2016-venezuela-cafe-con-leche-index/?terminal=true">Venezuelan Cafe Con Leche Index</a>, based on the price of a cup of coffee, suggests it is now about 380,000%.</p>
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<p>About <a href="https://www.unhcr.org/news/press/2018/11/5be4192b4/number-refugees-migrants-venezuela-reaches-3-million.html">3 million Venezuelans</a> – a tenth of the population – have fled the country. This is the largest human displacement in Latin American history, driven by shortages of everything including food as well as the Maduro regime’s <a href="https://www.amnesty.org/en/countries/americas/venezuela/report-venezuela/">oppressive treatment of dissent</a>. </p>
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Read more:
<a href="https://theconversation.com/venezuela-is-fast-becoming-a-mafia-state-heres-what-you-need-to-know-109887">Venezuela is fast becoming a 'mafia state': here's what you need to know</a>
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<p>No wonder, then, that Maduro, who has just begun his second term as president, is now under considerable domestic and international pressure to call new elections.</p>
<p>So how did things get so bad? How did inflation become hyperinflation in Venezuela? And how do Venezuelans deal with it?</p>
<h2>The cost of goods and the value of currency</h2>
<p>What we pay for goods and services reflects not only their cost of production but also of the value of the currency we buy them in. If that currency loses value against the currency the goods are sold in, the price of those goods goes up. </p>
<p>By 2014 the value of Venezuela’s currency, the bolívar, and the prosperity of the Venezuelan economy, was highly dependent on oil exports. More than 90% of the country’s export earnings came from oil.</p>
<p>These export earnings had enabled the government headed by Hugo Chavez from 1999 to 2013 to pay for social programs intended to combat poverty and inequality. From subsidies for those on low incomes to health services, the government’s spending obligations were high.</p>
<p>Then the global price of oil dropped. Foreign demand for the bolívar to buy Venezuelan oil crashed. As the currency’s value fell, the cost of imported goods rose. The Venezuelan economy went into crisis. </p>
<p>The solution of Venezuela’s new president Nicolas Maduro, who succeeded Chavez in March 2013, was to print more money.</p>
<p>That might seem silly, but it can keep the economy moving while it gets over a hump caused by a short-term price shock. </p>
<p>The Venezuelan crisis, however, just got worse as the oil price continued to fall, compounded by other factors that reduced Venezuelan oil output. International investors began looking elsewhere, driving the value of the bolívar even lower.</p>
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Read more:
<a href="https://theconversation.com/curious-kids-why-dont-poorer-countries-just-print-more-money-107633">Curious Kids: why don’t poorer countries just print more money?</a>
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<p>In these conditions, printing more money simply made the problem worse. It added to the supply of currency, pushing the value down even further. As prices rose, the government printed more money to pay its bills. This cycle is what causes hyperinflation. </p>
<h2>Playing the currency market</h2>
<p>Circumstances like these quickly make saving money in the local currency nonsensical. To protect themselves, Venezuelans started to convert their savings into a more stable currency, like the US dollar. This lowered the value of the bolívar even further.</p>
<p>The government responded by issuing currency controls. It set a fixed exchange rate, to stop the official value of the bolívar dropping against the US dollar, and made it difficult to actually get permission to exchange bolívares into US dollars. The idea was to stabilise the currency by effectively shutting down all currency transactions.</p>
<p>US dollars were still available on the black market, however. This meant going to any number of operators on the streets of downtown Caracas or asking a friend to hook you up. As the crisis deepened, more and more Venezuelans looked to switch their bolívares into US dollars. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/257179/original/file-20190205-86233-6r2unm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/257179/original/file-20190205-86233-6r2unm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/257179/original/file-20190205-86233-6r2unm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/257179/original/file-20190205-86233-6r2unm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/257179/original/file-20190205-86233-6r2unm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/257179/original/file-20190205-86233-6r2unm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/257179/original/file-20190205-86233-6r2unm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/257179/original/file-20190205-86233-6r2unm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">By mid-2018 the official foreign exchange rate was about 250,000 bolívares to one US dollar.</span>
<span class="attribution"><span class="source">shutterstock</span></span>
</figcaption>
</figure>
<p>This increasing demand meant the black market price for greenbacks rose, creating a difference between the official exchange rate (set by the government) and the unofficial going rate. </p>
<p>With this came new opportunities. In 2014 reports emerged that groups of middle-aged women were crossing the border to use ATMs in Colombia. They could withdraw funds from their Venezuelan accounts as US dollars at the official rate. They could then cross back into Venezuela and exchange the dollars for bolívares at the unofficial rate, making a tidy profit. Government officials able to exchange bolívares for US dollars within Venezuela had their own version of this practice. </p>
<p>This pushed the price of US dollars up, and that of bolívars down, even more. As the crisis deepened increasing numbers of ordinary Venezuelans began to engage in the unofficial currency market. </p>
<p>Sometimes this took the form of taking subsidised Venezuelan goods like food across the border to sell. This earned the sellers foreign currency, but it also exacerbated shortages of goods within the country, driving prices up even further. </p>
<p>This does not mean Venezuela’s currency crisis is the fault of ordinary Venezuelans. Illegal economic activity is largely a coping mechanism, a bellwether of the actual economy’s ability to provide for people. When a government fails its responsibilities, it should be no surprise that people protect themselves through unofficial currency trading. This is exactly what big international investors do all the time, albeit through more official channels. </p>
<h2>Cannot be trusted</h2>
<p>By August 2018 the Venezuelan currency was worth so little that it was more prudent to <a href="https://www.bbc.com/news/world-latin-america-45246409">use cash for toilet paper</a> rather than buy toilet paper. </p>
<p>The government tried to get on top of this situation by issuing a currency devaluation. Maduro devalued the bolívar by 95%, the largest currency devaluation in contemporary world history. He also tied the new currency to the price of oil, an economic experiment designed to show the Venezuelan economy had solid foundations. </p>
<p>By bringing the bolívar’s value into line with the reality of what people actually thought it was worth, and showing it was backed by something valuable, oil, Maduro’s government hoped Venezuelans would believe in their own currency and not exchange it for dollars. This would help stabilise the economy overall.</p>
<p>But within weeks of the devaluation it was clear ordinary Venezuelans had not been convinced.</p>
<p>They had no reason to be, given the government was not addressing other issues, such as policies contributing to low productivity across the economy. The government’s increasing authoritarianism, including interfering with the constitution and elections, also signalled it was not to be trusted. </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/is-authoritarianism-bad-for-the-economy-ask-venezuela-or-hungary-or-turkey-106749">Is authoritarianism bad for the economy? Ask Venezuela – or Hungary or Turkey</a>
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</em>
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<p>Hyperinflation is a very difficult hole out of which to climb. Very few economies ever experience it, and it’s hard to stop it without massively cutting government spending. </p>
<p>It is easy, then, to see why millions of Venezuelans responded by dealing in the black market or taking their savings, and themselves, out the country altogether. </p>
<p>As the political crisis in the country deepens, Venezuelans will have to continue to seek ways to allow them to survive the storm any way they can.</p><img src="https://counter.theconversation.com/content/102483/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Carmody does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Venezuela’s hyperinflation has been caused by an inept public policy of printing more money and private individuals making the most of differences between official and unofficial exchange rates.Michelle Carmody, Academic Specialist, Latin America, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1098902019-01-15T15:10:32Z2019-01-15T15:10:32ZBold steps Mnangagwa should be taking instead of fiddling with the petrol price<figure><img src="https://images.theconversation.com/files/253840/original/file-20190115-152986-1z00z45.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Zimbabwe erupted in violent protest after the government doubled the price of petrol. </span> <span class="attribution"><span class="source">EPA-EFE/Aaron Ufumeli</span></span></figcaption></figure><p>When economically challenged rulers try to run nations, especially fragile ones, they can easily make mistakes. </p>
<p>In the past few weeks demonstrators have taken to the streets of Khartoum and Omdurman to protest Sudanese President Omar al-Bashir’s removal of subsidies that have long kept <a href="https://www.aljazeera.com/news/2019/01/sudan-official-death-toll-protests-rises-24-190113065645372.html">bread and fuel affordable</a>. </p>
<p>Now it’s Zimbabwe’s turn. Just before flying off to Russia last weekend, President Emmerson Mnangagwa <a href="https://www.news24.com/Africa/Zimbabwe/zimbabwes-president-hikes-fuel-prices-to-tackle-shortages-20190113">doubled the price of petrol</a>. Doing so brought already impoverished urban Zimbabweans out onto the streets of the capital Harare as well as Bulawayo and a dozen other cities and towns. Protesters blocked roads with tyres, trees and rocks, stopped bus transport, attacked the police, threw canisters of tear gas back at security forces and <a href="https://www.news24.com/Africa/Zimbabwe/deaths-in-zimbabwe-fuel-protests-says-security-minister-20190115">generally ran amok</a>. </p>
<p>At least five people <a href="https://www.washingtonpost.com/world/africa/military-deploys-in-zimbabwe-fuel-hike-protests-5-killed/2019/01/15/d44875f6-18aa-11e9-b8e6-567190c2fd08_story.html?utm_term=.2af9f13b1349">were reported</a> to have been killed. Flights into Harare <a href="https://www.timeslive.co.za/news/africa/2019-01-14-fastjet-cancels-flights-as-zimbabwe-unrest-continues-countrywide/">were cancelled</a> and the government <a href="https://www.techzim.co.zw/2019/01/econet-and-telone-shut-down-the-internet-completely-now-its-darkeness/amp/?__twitter_impression=true">closed down the internet</a>. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1085088020640997376"}"></div></p>
<p>Mnangagwa’s excuse for raising prices so abruptly is not clear. Possibly he thinks that more costly petrol will bring more cash into national coffers that are mostly bare. Or perhaps he believes that more petrol will pour into the country via the pipeline from Beira in Mozambique if it is more valuable. Both ideas are barmy. </p>
<p>Before flying off to Russia, Mnangagwa said that the fuel price rise was intended to reduce shortages of fuel that, he indicated, were caused by rises in the use of fuel and what he called <a href="https://www.news24.com/Africa/Zimbabwe/anger-as-mnangagwa-raises-gas-prices-in-zimbabwe-20190113-2">“rampant” illegal trading</a> – accusations that make no sense whatsoever. Making petrol purchasing more expensive for poor Zimbabweans – the majority of the nation’s people – simply adds to their hardship and further slows an already crippled economy.</p>
<p>Instead Mnangagwa should do everything his government can to reduce the shortage of real (rather than fake) cash that is crippling the local economy, reducing local production and corporate and consumer cash flows, and driving an already weakened economy <a href="https://ewn.co.za/2019/01/12/zimbabwe-plans-new-currency-as-dollar-shortage-bites-finance-minister">further into recession</a>.</p>
<p>He should also be focused on taking a number of other bold steps to try and reverse the collapse of the country’s economy. Among them are bringing state looting to a halt.</p>
<h2>The cash crisis</h2>
<p>The US dollar is the official currency of commerce. But because Zimbabwe’s economy has essentially ground to a halt, it has few means of bringing new dollars into the country. That, and the steady money laundering of real dollars by high-level officials of the ruling Zanu-PF party, has drained the country of <a href="https://www.newsday.co.zw/2018/10/looting-of-state-resources-to-blame-for-economic-crisis/">currency</a>. </p>
<p>The government has printed $1 bond notes — known as <a href="https://businesstimes.co.zw/dollars-vs-zollars-zim-puts-accounting-standards-to-test/">zollars</a> – for Zimbabweans to use instead of real dollars. They are supposed to be exchangeable at par, but in 2019 they are worth as little as a third of a paper dollar. Many merchants refuse to accept zollars at all.</p>
<p>Bond notes now trade on the black market at 3.2 per dollar, <a href="https://www.bloomberg.com/news/articles/2019-01-14/no-currency-just-a-currency-crisis-zimbabwe-s-woes-deepen">according</a> to the Harare-based ZimBollar Research Institute.</p>
<p>The stress has also spread to financial markets, with locals piling into equities to hedge against price increases. </p>
<p>Mnangagwa may be <a href="https://www.bloomberg.com/news/articles/2019-01-15/with-president-mnangagwa-in-russia-zimbabwe-descends-into-chaos">attempting to obtain loans</a> from Russia and from shady Central Asian countries <a href="https://carnegieendowment.org/2016/02/04/kazakhstan-at-twenty-five-stable-but-tense-pub-62642">like Kazakhstan</a>. But what the president should be doing is prosecuting and imprisoning his corrupt cronies. That could limit the flight of dollars from Zimbabwe. </p>
<p>He also needs to trim the bloated civil service of excessive patronage appointments. Most of all, if he dared, he should be cutting military expenditures. Zimbabwe has no imaginable need for its large and well equipped a security establishment.</p>
<p>Such bold measures could return confidence to the country’s corporate and agri-business sectors. If coupled with reduced military and other expenditures, and bolstered by funds no longer being transferred overseas, Zimbabwe’s long repressed economy could take off from a very low base.</p>
<h2>Poor leadership</h2>
<p>Raising petrol prices in a land where but a few months ago supplies of petrol were short and motorists <a href="https://www.abc.net.au/news/2018-10-27/zimbabwe-suffering-worst-economic-crisis-in-a-decade/10433028">queued for hours and days</a> outside stations is neither politically nor economically wise. The newly aroused protesters will not readily melt away. Putting such a hefty extra charge on an essential commodity, and doing so just when Zimbabwe’s parlous economy was beginning to show signs of stability, shows few leadership skills and little common sense.</p>
<p>Inflation has soared since the national election in July, almost reaching the <a href="https://www.google.com/search?q=sudan+70%25+inflation&rlz=1C1NHXL_enZA711ZA711&tbm=isch&tbo=u&source=univ&sa=X&ved=2ahUKEwiwn7u4oO_fAhVMUBUIHVJzAKEQsAR6BAgEEAE&biw=1283&bih=638">Sudanese level of 70% a year</a>. Foreign capital and domestically reinvested capital is avoiding the country. </p>
<p>On top of this, exporters are struggling under draconian Reserve Bank regulations. Only Chinese purchases of ferrochrome, other metals and tobacco, keep the economy ticking over, albeit in an increasingly dilatory manner.</p>
<p>A further drain on confidence and economic rational thinking is the Reserve Bank’s allocation of whatever hard currency there is to politically prominent backers of the president. That is how arbitrage during President Robert Mugabe’s benighted era helped to enrich his entourage while sinking the Zimbabwean economy and impoverishing its peoples.</p>
<h2>Work that needs to be done</h2>
<p>Mnangagwa’s regime has much more work to do to stimulate sustainable economic growth. He will need to restore the rule of law, badly eroded in Mugabe’s time, put some true meaning into his <a href="https://www.timeslive.co.za/news/africa/2018-11-20-socialites-laying-low-as-zimbabwes-government-cracks-down-on-big-spenders/">“back to honest business”</a> promise, and widely open up the economy. That would mean eliminating most Reserve Bank restrictions on the free flow of currency and allowing the entire Zimbabwean economy once again to float.</p>
<p>Most of all, Mnangagwa needs to rush home from Russia and Asia and rescind or greatly reduce the price of petrol. After so many years of repression and hardship, Zimbabweans are out of patience.</p><img src="https://counter.theconversation.com/content/109890/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Rotberg does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>President Emmerson Mnangagwa’s decision to double the price of petrol shows very poor judgement and bad leadership.Robert Rotberg, Founding Director of Program on Intrastate Conflict, Harvard Kennedy SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1076332018-12-17T11:30:41Z2018-12-17T11:30:41ZCurious Kids: why don’t poorer countries just print more money?<figure><img src="https://images.theconversation.com/files/250903/original/file-20181217-185249-1xbqyla.jpg?ixlib=rb-1.1.0&rect=0%2C29%2C5000%2C3293&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Mo' money, mo' problems. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/due-economic-crisis-hyperinflation-venezuela-unofficial-1032260494?src=jH_j38WW9jJ9FUowcFG7Kw-1-0">Shutterstock.</a></span></figcaption></figure><p><em><a href="https://theconversation.com/au/topics/curious-kids-36782">Curious Kids</a> is a series for children of all ages, where The Conversation asks experts to answer questions from kids. All questions are welcome: find out how to enter at the bottom of this article.</em> </p>
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<blockquote>
<p><strong>Why don’t poorer countries just print more money? – Clementine, age 12, London, UK</strong></p>
</blockquote>
<p>Thanks for the question, Clementine. When a whole country tries to get richer by printing more money, it rarely works. Because if everyone has more money, prices go up instead. And people find they need more and more money to buy the same amount of goods. </p>
<p>This <a href="https://www.theguardian.com/world/2018/aug/20/venezuela-bolivars-hyperinflation-banknotes">happened recently</a> in Zimbabwe, in Africa, and in Venezuela, in South America, when these countries printed more money to try to make their economies grow. </p>
<p>As the printing presses sped up, prices rose faster, until these countries started to suffer from something called “hyperinflation”. That’s when prices rise by an amazing amount in a year. </p>
<p>When Zimbabwe was hit by hyperinflation, in 2008, prices rose as much as <a href="https://www.theguardian.com/world/2008/oct/09/zimbabwe">231,000,000% in a single year</a>. Imagine, a sweet which cost one Zimbabwe dollar before the inflation would have cost 231m Zimbabwean dollars a year later. </p>
<p>This amount of paper would probably be worth more than the banknotes printed on it. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/250904/original/file-20181217-185255-1g29p8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/250904/original/file-20181217-185255-1g29p8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/250904/original/file-20181217-185255-1g29p8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/250904/original/file-20181217-185255-1g29p8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/250904/original/file-20181217-185255-1g29p8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/250904/original/file-20181217-185255-1g29p8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/250904/original/file-20181217-185255-1g29p8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Have you ever seen so much money?</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/banknotes-zimbabwe-after-hyperinflation-1185502480?src=d6qGsQol7rYGPlGxbztaeQ-1-34">Shutterstock.</a></span>
</figcaption>
</figure>
<h2>Rising prices</h2>
<p>To get richer, a country has to make and sell more things – whether goods or services. This makes it safe to print more money, so that people can buy those extra things. </p>
<p>If a country prints more money without making more things, then prices just go up. For example, think of those special vintage Star Wars toys from the 1970s, which <a href="https://flipsy.com/article/1286/star-wars-action-figures-worth-thousands-heres-sell">can be worth a lot of money</a>. </p>
<p>No one is making any more of these models. So even if everyone gets more money to spend, it won’t mean that more people can afford to buy them. The sellers will just put the price up. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"755416542217641985"}"></div></p>
<p>At the moment, there is one country that can get richer by printing more money, and that’s the United States (a country that is <a href="https://www.statista.com/statistics/270180/countries-with-the-largest-gross-domestic-product-gdp-per-capita/">already very wealthy</a>). </p>
<p>This is because most of the valuable things that countries around the world buy and sell to one another, including gold and oil, are priced in US dollars. </p>
<p>So, if the US wants to buy more things, it really can just print more dollars. Though if it printed too many, the price of those things in dollars would still go up.</p>
<h2>Too much, too fast</h2>
<p>Of course, poorer counties can only print their own currency, not US dollars. And if they print a lot more, their prices will go up too fast, and people will stop using that money. </p>
<p>Instead, people will swap goods for other goods, or ask to be paid in US dollars instead. That’s what happened in Zimbabwe and Venezuela, and many other countries that were hit by hyperinflation.</p>
<p>Venezuela tried to protect its people from hyperinflation by passing laws to keep a low price on things people need most, like food and medicines. But that just meant that the shops and pharmacies <a href="https://www.reuters.com/news/picture/venezuelas-empty-shelves-idUSRTX47AWF">ran out</a> of those things.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/250906/original/file-20181217-185264-3vo1dc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/250906/original/file-20181217-185264-3vo1dc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/250906/original/file-20181217-185264-3vo1dc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/250906/original/file-20181217-185264-3vo1dc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/250906/original/file-20181217-185264-3vo1dc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/250906/original/file-20181217-185264-3vo1dc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/250906/original/file-20181217-185264-3vo1dc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Empty shelves in a Venezuelan supermarket.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/caracas-venezuela-january-14-2018-empty-1032262798">Sunsinger/Shutterstock.</a></span>
</figcaption>
</figure>
<h2>The dismal science</h2>
<p>But it’s not true that a country can <em>never</em> get richer by printing money. This can happen, if it doesn’t have enough money to start with. If there’s a shortage of money, businesses can’t sell enough, or pay all their workers. People can’t even borrow money from banks, because they don’t have enough either. </p>
<p>In this case, printing more money lets people spend more, which lets companies produce more, so there are more things to buy as well as more money to buy them with. </p>
<p>In 2008, there was the <a href="https://www.huffingtonpost.com/james-randel/understanding-the-economi_b_520283.html">Global financial crisis</a>, when banks lost a lot of money, and couldn’t let their customers have it. Luckily, most countries have central banks, which help to run the other banks, and they printed extra money to get their economies moving again. </p>
<p>Too little money makes prices fall, which is bad. But printing more money, when there isn’t more production, makes prices rise, which can be just as bad. No wonder economics - the study of money, trade and business - is often called the “dismal science”.</p>
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<li><p><em><a href="https://theconversation.com/curious-kids-how-do-people-know-what-the-weather-will-be-108295?utm_source=TCUK&utm_medium=linkback&utm_campaign=TCUKengagement&utm_content=CuriousKidsUK">How do people know what the weather will be? – Liam, age five, Australia</a></em></p></li>
<li><p><em><a href="https://theconversation.com/curious-kids-do-different-people-see-the-same-colours-107972?utm_source=TCUK&utm_medium=linkback&utm_campaign=TCUKengagement&utm_content=CuriousKidsUK">Do different people see the same colours? – Henrietta, age 12, Market Harborough, UK</a></em></p></li>
<li><p><em><a href="https://theconversation.com/curious-kids-how-does-the-moon-being-so-far-away-affect-the-tides-on-earth-105371?utm_source=TCUK&utm_medium=linkback&utm_campaign=TCUKengagement&utm_content=CuriousKidsUK">How does the Moon, being so far away, affect the tides on Earth? – Lachie, age eight, Melbourne, Australia</a></em></p></li>
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<p class="fine-print"><em><span>Alan Shipman has received funding from the British Academy.. </span></em></p>When poorer countries print more money, it doesn’t make them richer – it just means people need more money to buy the same things.Alan Shipman, Lecturer in Economics, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1003672018-07-23T10:23:31Z2018-07-23T10:23:31ZThe Federal Reserve needs to remain independent of the whims of politicians<p>President Donald Trump <a href="https://www.bloomberg.com/news/articles/2018-07-19/trump-trespasses-on-fed-independence-blasting-powell-rate-hikes">recently attacked</a> the Federal Reserve’s policy of gradually raising interest rates, breaking with decades of precedent respecting the U.S. central bank’s independence. </p>
<p>This isn’t the first time the Fed’s cherished independence has been threatened. Some conservative lawmakers <a href="https://www.washingtonpost.com/news/wonk/wp/2013/11/16/heres-whats-wrong-with-rand-pauls-audit-the-fed-bill/">have been arguing</a> for years that Congress should audit the central bank and <a href="https://www.congress.gov/bill/114th-congress/senate-bill/264/text">take a more active role</a> overseeing monetary policy. </p>
<p>Arguments that the Fed needs direct oversight or that it should do what the president wants it to do betray a misunderstanding of what it means for a central bank to be independent and how monetary policy is crafted and carried out. </p>
<p>In <a href="https://theconversation.com/profiles/sheila-tschinkel-158499">my 20 years working at the Fed</a>, first in New York where I helped implement monetary policy and then in Atlanta as the senior officer in charge of research, I learned that dealing with the unexpected is the day-to-day reality of the job. And it’s best if your hands aren’t tied. </p>
<p>If the Fed loses its independence, then its policy will become less sensitive to what’s going on in the real world and more of a hostage to people who know far less about designing and implementing monetary policy. I believe that would be a significant step backward and could run the risk of outright disaster.</p>
<h2>What Fed ‘independence’ really means</h2>
<p>Social scientists of all political persuasions no longer even debate the question of whether a country’s central bank should be independent. </p>
<p>They <a href="http://www.sciencedirect.com/science/article/pii/S0165188914002188">recognize</a> the term refers only to how policy is implemented – free of political pressure – and that independence does not give the central bank the ability to set its own goals, as some lawmakers seem to think. </p>
<p>In fact, Congress has set various mandates for the Fed to follow since the <a href="https://www.frbsf.org/education/teacher-resources/what-is-the-fed/history/">latter’s creation in 1913</a>. And central bankers place public interest at the center of their deliberations. </p>
<p>At present, the Fed follows a <a href="https://www.chicagofed.org/publications/speeches/our-dual-mandate">dual mandate</a> of keeping inflation within a target range of around 2 percent while maximizing employment. <a href="https://www.econlib.org/archives/2015/04/congress_sets_t.html">Congress outlined these goals</a>, but the Fed itself needs the freedom to choose which instruments it employs to meet them. </p>
<p>A good analogy is building a house. The owner takes part in drafting the plans but doesn’t worry which type of hammer is used. Similarly in an operating room, the surgeon must be able to quickly choose which scalpels and other instruments will help her save the patient. While she follows the guidelines learned in medical school and past clinical experience, there is no time for excessive deliberation when someone’s life – or the U.S. economy – is on the line. </p>
<h2>Monetary policy is neither simple nor fixed</h2>
<p>Some lawmakers’ demand for an audit or direct oversight rests on the notion that there is a simple way to carry out monetary policy, as if there was one rule to follow. In the economics profession, the <a href="https://www.minneapolisfed.org/publications/the-region/the-veil-of-discretion">discussion of sticking to policy rules</a> has quieted down as economists learned, over and over, that constant changes in the way people and companies behave and continuous innovation undercut the foundation for rigid rules.</p>
<p>For example, during parts of the 1970s and 1980s, the Fed <a href="http://www.ny.frb.org/aboutthefed/fedpoint/fed49.html">tried</a> a “money supply rule” that aimed to keep the expansion of currency in circulation and bank deposits to a range of growth rates. </p>
<p>At first it looked as if this would work well. That is until everyone could “create money” on a whim using a credit card. Whenever you use credit to buy a new computer or pay for groceries you’re getting a bank to lend you “money” that did not exist a second ago but suddenly does. </p>
<p>It did not make sense to target something that could not be controlled with any precision, so that rule was fortunately phased out in the 1990s. Similar rules such as the <a href="https://www.investopedia.com/ask/answers/09/gold-standard.asp">gold standard</a> and <a href="https://doi.org/10.1162/003355304772839605">fixed exchange rates</a> had already bit the dust.</p>
<h2>Revise and rewrite</h2>
<p>In fact, the way central banks carry out monetary policy in financially developed economies needs to be constantly revised. Or more accurately, rewritten, as demonstrated by the <a href="http://www.federalreserve.gov/monetarypolicy/fomchistorical2008.htm">deliberations of Fed officials</a> during the <a href="https://theconversation.com/us/topics/great-recession-13707">financial crisis of 2007-2009</a>. </p>
<p>That unfolding situation threatened economic and financial stability and drove unemployment higher. In its wake, the Fed brought its target interest rate down to zero and greatly enlarged its purchases of longer-term mortgage-backed and government bonds. As a result, unemployment fell substantially and growth turned around. By the end of 2015, the Fed was able to begin very gradually raising rates. And last October, it <a href="http://www.businessinsider.com/fed-plan-to-unwind-its-balance-sheet-didnt-skip-a-beat-2018-3">began</a> reducing the size of its greatly enlarged balance sheet. </p>
<p><a href="http://www.federalreserve.gov/monetarypolicy/fomchistorical2008.htm">Fed documents show</a> long debates and a lot of disagreement about these very unconventional and untested policies. Arguably thanks to the Fed’s flexibility and policymakers’ willingness to adapt to new and unexpected circumstances, the U.S. economy <a href="http://www.nber.org/cycles.html">has been growing steadily since 2009</a> and the <a href="https://money.cnn.com/2018/06/01/news/economy/may-jobs-report/index.html">unemployment rate hit</a> an 18-year low in May.</p>
<p>Would results have improved had the Fed been subject to regular congressional audits of its procedures in real time? Or if the Fed had been subject to presidential or political pressures to change its decisions?</p>
<p>This is the worst idea of all. </p>
<h2>Political tug of war</h2>
<p>There’s always been a tug of war between politicians who typically want to juice up the economy in the short term to improve their polling numbers and central bankers who must think about long-term growth and financial stability. President Trump, for example, <a href="https://www.reuters.com/article/us-usa-trump-fed/trump-amps-up-criticism-of-fed-interest-rate-rises-idUSKBN1KA1SG">is attacking rising short-term interest rates</a> – which, over time, may slow economic growth – just a few months before midterm elections. </p>
<p><a href="http://www.milkenreview.org/articles/federal-reserve-independence">Economists</a>, <a href="https://www.brookings.edu/wp-content/uploads/2016/06/14_financial_stability_central_banks.pdf">political scientists</a> and historians have reminded us that political interference with a central bank can lead to bad results. One such consequence is hyperinflation, such as in <a href="http://www.econlib.org/library/Enc/Hyperinflation.html">1930s Germany</a> or <a href="https://www.ft.com/content/5fe10fea-cd13-11e7-b781-794ce08b24dc">Zimbabwe</a> in recent decades. </p>
<p>They urge us to keep central banks independent of political meddling so that their purchases of government debt in financial markets are their own decisions and not the result of pressure to finance a growing government deficit. In the U.S., the Fed is not even permitted to buy debt directly from the U.S. Treasury, a department of the executive branch.</p>
<p>They also remind us that even in our age of transparency, it is not a good idea to broadcast information about banks or other financial institutions that may be close to failure. This is something that could easily result if the Fed were subject to congressional scrutiny because <a href="https://www.cia.gov/library/center-for-the-study-of-intelligence/kent-csi/vol41no5/html/v41i5a02p.htm">politicians have a history</a> of leaking sensitive <a href="https://www.washingtonpost.com/business/economy/report-accuses-2-gop-members-on-financial-crisis-panel-of-leaking-information/2011/07/13/gIQArCtCDI_story.html?utm_term=.b9c1cacb6530">financial</a> and other information for <a href="http://wjla.com/news/nation-world/intelligence-leaks-against-trump-suggest-a-political-motivation">political gain</a>. </p>
<p>Americans learned too much about panic during the Great Depression.</p>
<h2>When your house is on fire</h2>
<p>The Fed, certainly, could do a better job communicating what it does to the public and helping it understand how and why forecasts change as well as how ongoing innovation may affect its decisions. </p>
<p>But relying on politicians who worry mainly about getting re-elected is not the way to do this. </p>
<p>The Fed uses many different models of the economy and also assesses a ton of anecdotal information on evolving conditions in making policy decisions. Relying on an elected official like the president to make these decisions would not work. Nor would observing the Fed at work in real time or having Congress audit its policy procedures. </p>
<p>These are frightening proposals. On the latter, Americans should be well aware by now that Congress is not known for its flexibility and responsiveness. </p>
<p>If your house is on fire, would you appoint a study group to examine the causes and search for who may be at fault before you call 911? Similarly, in response to those who want to weaken the Fed because they’d like less regulation, do you think requiring smoke detectors when the public is at risk amounts to unnecessary government interference?</p>
<p>Our house would still be ashes from the last crisis if Congress or the president oversaw monetary policy. Let’s pray that never happens. </p>
<p><em>This is an updated version of an article <a href="https://theconversation.com/auditing-the-federal-reserve-is-a-frightening-idea-heres-why-38568">originally published</a> on March 13, 2015.</em></p><img src="https://counter.theconversation.com/content/100367/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sheila Tschinkel does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>President Trump has been attacking the Fed’s current policy of slowly raising interest rates. A former central bank official explains why that’s so troubling.Sheila Tschinkel, Visiting Faculty in Economics, Emory UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/918742018-02-14T15:18:00Z2018-02-14T15:18:00ZWhy does inflation make stock prices fall?<figure><img src="https://images.theconversation.com/files/206392/original/file-20180214-174982-1obv4hh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Even the big, bad Wall Street bull is scared of inflation.</span> <span class="attribution"><span class="source">AP Photo/Richard Drew</span></span></figcaption></figure><p>Stock markets <a href="https://www.nytimes.com/2018/02/08/business/stock-market-activity.html">have been on a wild ride</a> recently, plunging one day and then soaring the next. </p>
<p>Pundits have <a href="https://www.theguardian.com/business/2018/feb/06/stock-markets-dow-jones-five-key-factors">offered many reasons</a> for the biggest stock market swoon in two years. One of the most frequently blamed culprits was the <a href="https://www.theguardian.com/business/2018/feb/08/dow-jones-sinks-again-as-bond-yields-rise-and-higher-inflation-feared">threat of inflation</a>, which loosely means an increase in consumer prices over time. </p>
<p>That threat became a little more real after the latest data, released on Feb. 14, showed <a href="https://www.bloomberg.com/news/articles/2018-02-14/u-s-consumer-prices-rise-more-than-forecast-on-apparel-costs">inflation in January</a> rising more than expected, sending stocks and bonds lower. </p>
<p>What would prompt something so seemingly banal to send investors into a state of craziness and even panic? A closer look at inflation – a topic <a href="https://scholar.google.com/citations?user=1E8KAEsAAAAJ&hl=en&oi=sra">I’ve studied closely</a> – and how it affects markets offers some answers. It also hints that an economic slowdown is closer than you may think. </p>
<h2>What is inflation?</h2>
<p>Inflation is defined as the rate of change in the prices of everything from a bar of <a href="https://www.bls.gov/cpi/questions-and-answers.htm#Question_7">Ivory soap to the costs of an eye exam</a>. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1229&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1229&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1229&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1544&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1544&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1544&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Better, worse, same? It’s all in the CPI.</span>
<span class="attribution"><span class="source">Mega Pixel/Shutterstock.com</span></span>
</figcaption>
</figure>
<p>In the U.S., we measure inflation using something called the <a href="https://www.bls.gov/cpi/">consumer price index</a>. Simply put, the CPI is the average price of a basket of goods and services that households typically purchase. It’s used throughout the economy, for example to set pay raises or to adjust benefits for retirees. </p>
<p>The CPI increased 0.5 percent in January from the previous month on a seasonally adjusted basis, more than economists had forecast and the most since September. </p>
<p>Over the previous 12 months, the index gained about 2.1 percent on a nonseasonally adjusted basis, meaning the price of most <a href="https://www.bls.gov/opub/ted/2018/consumer-price-index-2017-in-review.htm">goods and services</a> rose by about that amount on average during the period. Some, such as hospital services, <a href="https://www.bls.gov/news.release/cpi.t07.htm">climbed at a faster pace</a> than the average (6 percent), while other categories rose more slowly or even declined, such as airline fares, which fell 5.1 percent. </p>
<p>Although inflation is <a href="https://data.bls.gov/pdq/SurveyOutputServlet?request_action=wh&graph_name=CU_cpibrief">still fairly low today</a>, this hasn’t always been the case. In 1979, inflation <a href="https://www.minneapolisfed.org/community/financial-and-economic-education/cpi-calculator-information/consumer-price-index-and-inflation-rates-1913">exceeded 11 percent</a>, a trend that persisted into the early 1980s. </p>
<p><a href="https://www.msn.com/en-us/news/other/the-stock-market-is-worried-about-inflation-should-it-be/ar-BBIPsXU">Some observers</a> are now worried it’s about to start accelerating again. </p>
<h2>The present value of money</h2>
<p>So what spooks stock investors about inflation? To answer that, let’s examine the two ways inflation directly affects stock prices. The first concerns how we value future income. </p>
<p>When you purchase a stock, for example in Walmart or IBM, you are actually buying a long stream of future cash flows based on the profits of the company. The value of the company (and its stock price) is based on how much these future cash flows are worth today, a finance concept called “<a href="https://www.investopedia.com/terms/p/presentvalue.asp">present value</a>.” The present value of any sum of money expected to be collected in the future is computed by factoring in the impact of interest rates and inflation.</p>
<p>For example, let’s say you win the lottery and you’re offered either US$10,000 in a year’s time or $9,600 right now. What should you do? Well, if you’re acting rationally and you don’t have any urgent debts that need paying off, you would try to determine what that $10,000 is currently worth. To do so, you would divide it by 1 plus the interest rate you could readily get at a bank, let’s say 3 percent (we’re assuming that there is no inflation). So the present value of $10,000 a year from now would be $9,709 – which means it’s best to be patient and wait, rather than take the money now.</p>
<p>Now let’s imagine the same scenario but with inflation, which is expected to be 2 percent during the period. Inflation causes the bank rate to be 5 percent, and as a result that 10 grand is actually worth only $9,524 today. In which case, take the $9,600. </p>
<p>Because inflation made the “discount rate” higher, the value today of the future $10,000 was reduced. The same thing happens to stocks. Since a stock’s price is just the risk-adjusted present value of the company’s future cash flows, a rise in inflation will cause it to drop as well. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">When investors buy Walmart stock, they’re really buying the expectation that all these customers will keep coming back and generating cash flows in the future for the company.</span>
<span class="attribution"><span class="source">AP Images for Walmart/Gunnar Rathbun</span></span>
</figcaption>
</figure>
<h2>Inflation’s flip side</h2>
<p>A second way inflation directly affects stocks has the opposite effect. That is, it should cause them to increase in value.</p>
<p>Rising prices means companies are able to make more money from every computer game, sofa or pastry they sell. A baker, for example, who sold bread for $5 a loaf increases the price to $5.50 because of strong demand. While the cost of the flour and yeast may have also climbed at the same pace, the baker still makes more money because profit goes up too. </p>
<p>That leads to higher future cash flows and thus a higher present value today.<br>
These two effects of inflation should in theory cancel each other out. And yet stock prices are usually <a href="https://www.usatoday.com/story/money/markets/2018/02/09/treasury-bond-yield-spike-spooks-stock-market-bulls/320946002/">hammered</a> when inflation rises. So what’s going on?</p>
<p>There’s lots of <a href="https://www.marketwatch.com/story/this-contrarian-investment-is-the-best-hedge-against-inflation-2018-02-08">evidence</a>, including my own <a href="http://www.jstor.org/stable/3594994?origin=crossref">research</a>, that many investors suffer from something called “inflation illusion.” They worry about the present value effect of inflation of stocks but they ignore the growth in cash flows and profits that result from higher inflation. This results in stock prices falling when they shouldn’t.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Stock markets have been a sea of red lately.</span>
<span class="attribution"><span class="source">AP Photo/Sadiq Asyraf</span></span>
</figcaption>
</figure>
<h2>Slowdown on the horizon</h2>
<p>However, there’s a third, indirect way inflation affects stocks. And this might be what is causing the concerns in the markets today. This effect has inflation playing the role of a canary in a coal mine, warning that bad times are coming.</p>
<p>To understand this, we have to consider how inflation varies through the <a href="http://www.nber.org/cycles.html">business cycle</a>, which is a way of measuring the growth of the economy from the beginning of an expansion to the end of a recession. </p>
<p>At the beginning of a cycle, inflation is often low. (It was practically <a href="https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093">nonexistent or even negative</a> following the financial crisis of 2008.) But as the economy heats up and people have more money to spend (as is the case now), companies begin to sell more goods and services at steadily increasing prices, earning <a href="http://money.cnn.com/2017/12/22/investing/corporate-profits-2017-wall-street/index.html">higher profits</a>, while <a href="https://www.reuters.com/article/us-usa-economy/u-s-jobless-claims-drop-to-near-45-year-low-idUSKBN1FS23K">most people are able to find work</a>. </p>
<p>As more stuff is being created and sold in the economy, the demand for raw materials and workers increases. Besides pushing up prices, this can also result in higher wages. The fastest increase in take-home pay in nine years was another “warning sign” that <a href="https://slate.com/business/2018/02/why-rising-wages-scare-the-heck-out-of-stock-market-investors.html">spooked investors</a> recently. </p>
<p>This is where we are now. If left unchecked, inflation could spike, which would likely cause the economy to slow down quickly and unemployment to increase. The combination of rising inflation and unemployment is called “<a href="https://www.investopedia.com/articles/economics/08/1970-stagflation.asp">stagflation</a>,” and is feared by economists, central bankers and pretty much everyone else. It’s what can cause an economic boom to suddenly turn to bust, as we saw in the late 1970s.</p>
<p>This is where the Federal Reserve steps in. The U.S. central bank has the ability, through various tools, to manipulate short-term interest rates. So before the economic party gets out of hand and stagflation takes hold, the Fed steps in to calm things down by increasing the cost of borrowing in an effort to gradually slow the economy rather than let it crash and burn.</p>
<p>Think of the Fed as the sensible person telling everyone to go home at midnight instead of partying until the early hours. It’ll spoil the fun at midnight, but we’ll all be happier the next day.</p>
<h2>Is the party over?</h2>
<p>Back to the current turmoil. The <a href="https://www.bls.gov/cpi/">latest CPI figures</a> suggest inflation may be accelerating, but it won’t be clear until we get a couple more readings. </p>
<p>For now, it’s mostly just the threat of inflation that’s causing trouble as investors begin to realize that the party is getting a little too crazy and that the Fed is going to step in and slow things down a bit. In other words, inflation is warning sign that an economic slowdown is coming – whether gradually executed by the Fed or abruptly by a spike in inflation.</p>
<p>So if all of this is understood, why did the market crash? Investors, naturally, want to stay at the party as long as they can. It is only when they see others heading for the exits that they realize maybe it’s time they left too, prompting a rush to the door. Thus the market tanks. </p>
<p>This is why a market can appear to be doing great and then suddenly fall at the first hint of inflation.</p>
<p><em>This is an updated version of an article originally published on Feb. 12, 2018.</em></p><img src="https://counter.theconversation.com/content/91874/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard S. Warr does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>While many market observers blame growing concerns about inflation for the stock market crash, the real culprit may be fears that the economy is about to slow.Richard S. Warr, Professor of Finance, North Carolina State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/915572018-02-12T11:40:12Z2018-02-12T11:40:12ZStocks hate inflation – here’s why<figure><img src="https://images.theconversation.com/files/205845/original/file-20180211-51731-1d1x09v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Inflation may be a bull market's greatest enemy. </span> <span class="attribution"><span class="source">AP Photo/Richard Drew</span></span></figcaption></figure><p>Stock markets <a href="https://www.nytimes.com/2018/02/08/business/stock-market-activity.html">have been on a wild ride</a> recently, plunging one day and then soaring the next. Since its peak in late January, the Standard & Poor’s 500 index has declined more than 10 percent, signaling a market “correction” beyond just a temporary blip. </p>
<p>Pundits have <a href="https://www.theguardian.com/business/2018/feb/06/stock-markets-dow-jones-five-key-factors">offered many reasons</a> for the biggest stock market swoon in two years. One of the most frequently blamed culprits is <a href="https://www.theguardian.com/business/2018/feb/08/dow-jones-sinks-again-as-bond-yields-rise-and-higher-inflation-feared">inflation</a>, which loosely means an increase in consumer prices over time. </p>
<p>What would prompt something so seemingly banal to send investors into a state of craziness and even panic? A closer look at inflation – a topic <a href="https://scholar.google.com/citations?user=1E8KAEsAAAAJ&hl=en&oi=sra">I’ve studied closely</a> – and how it affects markets offers some answers. It also hints that an economic slowdown is closer than you may think. </p>
<h2>What is inflation?</h2>
<p>Inflation is defined as the rate of change in the prices of everything from a bar of <a href="https://www.bls.gov/cpi/questions-and-answers.htm#Question_7">Ivory soap to the costs of an eye exam</a>. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1229&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1229&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1229&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1544&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1544&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1544&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Better, worse, same? It’s all in the CPI.</span>
<span class="attribution"><span class="source">Mega Pixel/Shutterstock.com</span></span>
</figcaption>
</figure>
<p>In the U.S., we measure inflation using something called the <a href="https://www.bls.gov/cpi/">consumer price index</a>. Simply put, the CPI is the average price of a basket of goods and services that households typically purchase. It’s used throughout the economy, for example to set pay raises or to adjust benefits for retirees. </p>
<p>The CPI increased about 2.1 percent in December from a year earlier, meaning the price of most <a href="https://www.bls.gov/opub/ted/2018/consumer-price-index-2017-in-review.htm">goods and services</a> rose by about that amount on average during the period. Some, such as hospital services, climbed at a faster pace than the average (5.1 percent), while other categories rose more slowly or even declined, such as airline fares, which fell 4 percent. </p>
<p>Although inflation is <a href="https://data.bls.gov/pdq/SurveyOutputServlet?request_action=wh&graph_name=CU_cpibrief">pretty low today</a>, this hasn’t always been the case. In 1979, inflation <a href="https://www.minneapolisfed.org/community/financial-and-economic-education/cpi-calculator-information/consumer-price-index-and-inflation-rates-1913">exceeded 11 percent</a>, a trend that persisted into the early 1980s. </p>
<p><a href="https://www.msn.com/en-us/news/other/the-stock-market-is-worried-about-inflation-should-it-be/ar-BBIPsXU">Some observers</a> are now worried it’s about to start accelerating again. </p>
<h2>The present value of money</h2>
<p>So what spooks stock investors about inflation? To answer that, let’s examine the two ways inflation directly affects stock prices. The first concerns how we value future income. </p>
<p>When you purchase a stock, say for example in Walmart or IBM, you are actually buying a long stream of future cash flows based on the profits of the company. The value of the company (and its stock price) is based on how much these future cash flows are worth today, a finance concept called “<a href="https://www.investopedia.com/terms/p/presentvalue.asp">present value</a>.” The present value of any sum of money expected to be collected in the future is computed by factoring in the impact of interest rates and inflation.</p>
<p>For example, let’s say you win the lottery and you’re offered either US$10,000 in a year’s time or $9,600 right now. What should you do? Well, if you’re acting rationally and you don’t have any urgent debts that need paying off, you would try to determine what that $10,000 is currently worth. To do so, you would divide it by 1 plus the interest rate you could readily get at a bank, let’s say 3 percent (we’re assuming that there is no inflation). So the present value of $10,000 a year from now would be $9,709 – which means it’s best to be patient and wait, rather than take the money now.</p>
<p>Now let’s imagine the same scenario but with inflation, which is expected to be 2 percent during the period. Inflation causes the bank rate to be 5 percent, and as a result that ten grand is actually worth only $9,524 today. In which case, take the $9,600. </p>
<p>Because inflation made the “discount rate” higher, the value today of the future $10,000 was reduced. The same thing happens to stocks. Since a stock’s price is just the risk-adjusted present value of the company’s future cash flows, a rise in inflation will cause it to drop as well. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">When investors buy Walmart stock, they’re really buying the expectation that all these customers will keep coming back and generating cash flows in the future for the company.</span>
<span class="attribution"><span class="source">AP Images for Walmart/Gunnar Rathbun</span></span>
</figcaption>
</figure>
<h2>Inflation’s flip side</h2>
<p>A second way inflation directly affects stocks has the opposite effect. That is, it should cause them to increase in value.</p>
<p>Rising prices means companies are able to make more money from every computer game, sofa or pastry they sell. A baker, for example, who sold bread for $5 a loaf, increases the price to $5.50 because of strong demand. While the cost of the flour and yeast may have also climbed at the same pace, the baker still makes more money because profit goes up too. </p>
<p>That leads to higher future cash flows and thus a higher present value today.<br>
These two effects of inflation should in theory cancel each other out. And yet stock prices are usually <a href="https://www.usatoday.com/story/money/markets/2018/02/09/treasury-bond-yield-spike-spooks-stock-market-bulls/320946002/">hammered</a> when inflation rises. So what’s going on?</p>
<p>There’s lot of <a href="https://www.marketwatch.com/story/this-contrarian-investment-is-the-best-hedge-against-inflation-2018-02-08">evidence</a>, including my own <a href="http://www.jstor.org/stable/3594994?origin=crossref">research</a>, that many investors suffer from something called “inflation illusion.” They worry about the present value effect of inflation of stocks but they ignore the growth in cash flows and profits that result from higher inflation. This results in stock prices falling when they shouldn’t.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Stock markets have been a sea of red lately.</span>
<span class="attribution"><span class="source">AP Photo/Sadiq Asyraf</span></span>
</figcaption>
</figure>
<h2>Slowdown on the horizon</h2>
<p>However, there’s a third, indirect way inflation affects stocks. And this might be what is causing the concerns in the markets today. This effect has inflation playing the role of a canary in a coal mine, warning that bad times are coming.</p>
<p>To understand this, we have to consider how inflation varies through the <a href="http://www.nber.org/cycles.html">business cycle</a>, which is a way of measuring the growth of the economy from the beginning of an expansion to the end of a recession. </p>
<p>At the beginning of a cycle, inflation is often low. (It was practically <a href="https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093">nonexistent or even negative</a> following the financial crisis of 2008.) But as the economy heats up and people have more money to spend (as is the case now), companies begin to sell more goods and services at steadily increasing prices, earning <a href="http://money.cnn.com/2017/12/22/investing/corporate-profits-2017-wall-street/index.html">higher profits</a>, while <a href="https://www.reuters.com/article/us-usa-economy/u-s-jobless-claims-drop-to-near-45-year-low-idUSKBN1FS23K">most people are able to find work</a>. </p>
<p>As more stuff is being created and sold in the economy, the demand for raw materials and workers increases. Besides pushing up prices, this can also result in higher wages. The fastest increase in take-home pay in nine years was another “warning sign” that <a href="https://slate.com/business/2018/02/why-rising-wages-scare-the-heck-out-of-stock-market-investors.html">spooked investors</a> recently. </p>
<p>This is where we are now. If left unchecked, inflation could spike, which would likely cause the economy to slow down quickly and unemployment to increase. The combination of rising inflation and unemployment is called “<a href="https://www.investopedia.com/articles/economics/08/1970-stagflation.asp">stagflation</a>,” and is feared by economists, central bankers and pretty much everyone else. It’s what can cause an economic boom to suddenly turn to bust, as we saw in the late 1970s.</p>
<p>This is where the Federal Reserve steps in. The U.S. central bank has the ability, through various tools, to manipulate short-term interest rates. So before the economic party gets out of hand and stagflation takes hold, the Fed steps in to calm things down by increasing the cost of borrowing in an effort to gradually slow the economy rather than let it crash and burn.</p>
<p>Think of the Fed as the sensible person telling everyone to go home at midnight instead of partying till the early hours. It’ll spoil the fun at midnight, but we’ll all be happier the next day.</p>
<h2>Is the party over?</h2>
<p>Back to the current turmoil. At the moment, we don’t know whether inflation is in fact accelerating. We may find out on Feb. 14, <a href="https://www.bls.gov/cpi/">when the CPI figures</a> for January are released. </p>
<p>For now, it’s just the threat of inflation that’s causing trouble as investors begin to realize that the party is getting a little too crazy and that the Fed is going to step in and slow things down a bit. In other words, inflation is warning sign that an economic slowdown is coming – whether gradually executed by the Fed or abruptly by a spike in inflation.</p>
<p>So if all of this is understood, why did the market crash? Investors, naturally, want to stay at the party as long as they can. It is only when they see others heading for the exits that they realize maybe it’s time they left too, prompting a rush to the door. Thus the market tanks. </p>
<p>This is why a market can appear to be doing great and then suddenly fall at the first hint of inflation.</p><img src="https://counter.theconversation.com/content/91557/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard S. Warr does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>While many market observers blame the growing threat of inflation for the stock market crash, the real culprit may be concerns that the economy is about to slow.Richard S. Warr, Professor of Finance, North Carolina State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/890182017-12-21T14:12:29Z2017-12-21T14:12:29ZInside Venezuela’s crisis: 7 essential reads<figure><img src="https://images.theconversation.com/files/199313/original/file-20171214-27568-10lxb03.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">AP Photo/Ricardo Mazalan</span></span></figcaption></figure><p>Since December 2014, a recession turned national emergency has left millions of Venezuelans impoverished, hungry and desperate. An estimated 54 percent of Venezuelan children are now malnourished. </p>
<p>As an editor on the Americas desk, this year I’ve asked numerous Venezuelan scholars to help readers understand the many different dimensions of this devolving situation. Here, their insights on Venezuela’s crisis.</p>
<h2>1. Venezuela is running out of cash</h2>
<p>To understand how a country that was once South America’s richest can no longer feed its citizens, just follow the oil, <a href="https://theconversation.com/nobody-is-going-to-bail-out-venezuela-87428">advises Venezuelan economist Henkel García U</a>. </p>
<p>“In 1998, the year before the late Hugo Chávez came into power, Venezuela was rich,” he notes. “It produced roughly 60 barrels of oil per inhabitant per year.”</p>
<p>Chávez – a populist who promised to lift millions out of poverty – took advantage of relatively high international oil prices to spend lavishly, funding social programs and importing basic goods like food and medicine. </p>
<p>But after Chávez’s 2003 state takeover of Petróleos de Venezuela, then Latin America’s biggest oil producer, oil production steadily decreased, even as government expenditures stayed high. </p>
<p>Over time, the imbalance between income and outlay would upend Venezuela’s entire economy.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/199314/original/file-20171214-27593-8se792.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/199314/original/file-20171214-27593-8se792.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=405&fit=crop&dpr=1 600w, https://images.theconversation.com/files/199314/original/file-20171214-27593-8se792.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=405&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/199314/original/file-20171214-27593-8se792.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=405&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/199314/original/file-20171214-27593-8se792.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=509&fit=crop&dpr=1 754w, https://images.theconversation.com/files/199314/original/file-20171214-27593-8se792.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=509&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/199314/original/file-20171214-27593-8se792.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=509&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">By 2015, Venezuela was no longer selling enough oil to keep importing basic necessities like food and medicine.</span>
<span class="attribution"><span class="source">Banco Central de Venezuela, FRED (Federal Reserve Bank of St. Louis), National Statistics Institute and Econométrica IE, C.A., CC BY</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>2. It has an unpayable national debt</h2>
<p>Rather than balance the budget by cutting expenditures and imports, however, the Chávez regime <a href="https://theconversation.com/inside-venezuelas-economic-collapse-80597">just piled up foreign debt</a>, says García U. Between 2005 and 2006, Venezuela’s foreign debt jumped from US$25 billion to $120 billion. </p>
<p>Then, in late 2014, international oil prices plunged. The country, by then led by Chávez’s uncharismatic successor, Nicolás Maduro, entered recession. Today, estimates of Venezuela’s public sector debt put it at $184.5 billion. </p>
<p>Domestic oil production has also declined, dropping 66 percent between 1998 and 2017, according to Garciá U’s analyses.</p>
<p>Selling less oil at lower prices has sapped government coffers. Imports of basic necessities like food and medicine have dropped to historic lows, meaning many grocery store and pharmacy shelves are empty.</p>
<p>Meanwhile, hyperinflation – which is anticipated to reach 2,700 percent by the end of this year – has left most Venezuelans unable to purchase what products are available. Treatable infections routinely kill Venezuelans who can’t get antibiotics, and children are now dying of hunger</p>
<p>In November, Venezuela defaulted on some of its national debt. </p>
<h2>3. Thousands have fled hunger and violence</h2>
<p>To escape this crisis, <a href="https://theconversation.com/thousands-flee-violence-and-hunger-in-venezuela-seeking-asylum-in-the-united-states-74495">many Venezuelans have sought refuge abroad</a>, says Emilio Osorio Alvarez, a migration scholar at the Central University of Venezuela. </p>
<p>In 2016, over 14,700 Venezuelans requested asylum in the United States, according to U.S. government data – a 150 percent increase over 2015. For the first time ever, Venezuelan topped the list of asylum-seekers, above Mexicans, El Salvadorans or Guatemalans. </p>
<p>Those who can credibly claim they are fleeing political persecution at home stand a strong chance of getting in, says Osorio. President Maduro has cracked down hard on dissent. At least 124 people were killed during protests against the regime in 2017, and human rights groups estimate that there are some 600 political prisoners in Venezuela. </p>
<p>Hunger and poverty, on the other hand, are not themselves grounds for asylum under international law.</p>
<h2>4. Protests became ‘a low-grade war’</h2>
<p>Among those who remain in Venezuela, millions organized earlier this year to fight for their country’s future. From March to July, hundreds of thousands of citizens marched daily in major cities across the country. </p>
<p>Under government orders, soldiers and police officers responded with force.</p>
<p>“Each day, acting spontaneously and with no clear leadership, fighting factions in cities across Venezuela…block streets…penetrate university campuses and crush their opponents,” <a href="https://theconversation.com/for-venezuela-there-may-be-no-happily-ever-after-81544">reported</a> Venezuelan political analyst Miguel Angel Latouche back in July. </p>
<p>Describing scenes of masked young demonstrators doing battle with state forces, Latouche said his home city of Caracas was living out “a low-grade war.”</p>
<p>“What else can you call a country in which…citizens routinely swallow tear gas?,” he asked. Latouche and his family have now left Venezuela – temporarily, they hope.</p>
<h2>5. The once-powerful opposition has all but collapsed</h2>
<p>For months, those huge daily marches seemed to be shifting the balance of power between the Maduro government and the resistance. But by October, the opposition – an alliance of numerous parties that began working together in 2008 to counterbalance Hugo Chávez’s regime – had been all but crushed. </p>
<p>Despite the opposition’s 75 percent approval rating, on Oct. 15 its candidates lost 17 of 23 governors races to candidates from Maduro’s Socialist Party. This stunning defeat showed that <a href="https://theconversation.com/venezuelas-opposition-is-on-the-verge-of-collapse-86187">participating in the gubernatorial elections had been a critical strategic misstep</a>, says Prof. Marcos Moreno-Aponte of St. Mary’s College California. </p>
<p>Many analysts expected the opposition to boycott them, Moreno-Aponte says. Domestic and international observers, including the U.S. State Department, believed that the regime’s control over electoral agencies would “make free and fair elections impossible.”</p>
<p>The opposition emerged from its loss on Oct. 15 profoundly divided, disheartened and quite possibly defeated. </p>
<h2>6. Elections are fake</h2>
<p>Maduro’s triumph in October was a blow to democracy, but not a surprising one, reckons political analyst Benigno Alarcón of the Andres Bello Catholic University, in Caracas. </p>
<p>The regime spent months – during which it refused to hold any elections– preparing a <a href="https://theconversation.com/venezuelas-elections-are-just-a-new-way-for-maduro-to-cling-to-power-87072">strategy for winning at the polls</a>, he says. Maduro’s success on Oct. 15 derived from two carefully deployed tactics, says Alarcón: “Suppressing turnout among opposition voters and using pork-barrel incentives to motivate his own base.” </p>
<p>Dirty tricks included keeping candidates who’d withdrawn from the governor’s race on the ballot and relocating voting centers in opposition-dominated areas into high-crime neighborhoods.</p>
<p>Government operatives also spread fake news about supposedly successful negotiations with opposition parties, stoking doubt among the many Venezuelans who oppose engagement with Maduro’s authoritarian regime.</p>
<p>“In other words,” assesses Alarcón, Maduro’s electoral strategy was “less about winning democratic legitimacy” than about “ensuring that his opponents los[t] it.” </p>
<h2>7. Hope for regime change is dimming</h2>
<p>Maduro reprised that winning strategy in the country’s mayoral elections in December, which were boycotted by the opposition.</p>
<p>The fact that Socialist Party candidates won 300 of 339 mayoral races on Dec. 10 thus <a href="https://theconversation.com/venezuelan-regime-sweeps-mayors-races-tightening-maduros-grip-on-power-89003">shouldn’t be misinterpreted as voter support for Maduro’s regime</a>, Alarcón cautions. Maduro’s approval ratings are still about 20 percent. </p>
<p>“The vast majority of Venezuelans want a change in government,” he says, adding that Maduro also faces opposition within his own Socialist Party. </p>
<p>Still, hope for regime change is dimming. In addition to using dirty tricks, Maduro has effectively been buying votes, handing out benefits like food and medicine in exchange for loyalty to the regime. </p>
<p>In late November, the president announced he would run for reelection in 2018. It’s unclear who can stop him.</p><img src="https://counter.theconversation.com/content/89018/count.gif" alt="The Conversation" width="1" height="1" />
How to understand the economic, political and humanitarian crisis that has brought a South American nation to its knees.Catesby Holmes, International Editor | Politics Editor, The Conversation USLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/817222017-08-11T10:59:16Z2017-08-11T10:59:16ZThe English Premier League is experiencing a textbook case of hyperinflation<p>The big summer transfer headline belongs to Neymar and his record-breaking £198m move from Barcelona to Paris Saint-Germain. But, by anyone’s standards, the spending across English Premier League football clubs has been similarly jaw-dropping. With £40m fees now commonplace, last year’s <a href="http://www.bbc.co.uk/sport/football/37209664">record-breaking spend</a> of £1.165 billion is almost certain to be <a href="https://www2.deloitte.com/uk/en/pages/sports-business-group/articles/annual-review-of-football-finance.html">smashed again</a> before the transfer window closes on August 31. </p>
<p>This season marks 25 years since the Premier League began and transfer fees have risen exponentially <a href="http://www.bbc.co.uk/news/resources/idt-sh/premier_league_25_1992_1997">over the past quarter century</a>. But it’s not the fees themselves that are being met with a growing sense of incredulity. Rather, it is the frequency in which vast amounts are being spent on players that are not established stars. </p>
<p>Manchester United’s big summer signing in 1992 was striker Dion Dublin for £1m (the equivalent of nearly £2m in today’s money). This summer has seen the likes of defender Kyle Walker go to <a href="http://www.skysports.com/football/news/11679/10948654/man-city-confirm-50m-signing-of-kyle-walker-from-tottenham">Manchester City for £50m</a> and Real Madrid benchwarmer <a href="http://www.independent.co.uk/sport/football/premier-league/alvaro-morata-signs-chelsea-transfer-latest-move-done-deal-real-madrid-a7854081.html">Alvaro Morata</a> go to Chelsea for £58m. Still, the extravagance of England’s top clubs, although shocking, should not come as much of a surprise. Nor should we expect it to last forever.</p>
<h2>‘Demand-pull inflation’</h2>
<p>It has been <a href="http://www.independent.co.uk/sport/football/transfers/premier-league-summer-transfer-window-record-spending-net-spend-romelu-lukaku-paul-pogba-a7853226.html">widely reported</a> that the football industry is experiencing an acute form of hyper-inflation. Specifically, we are seeing a classic case of what economists call “<a href="https://www.intelligenteconomist.com/demand-pull-inflation/">demand-pull inflation</a>”. This is when there is an increase in the supply of money (demand) while the supply of goods stays constant or depreciates. This is precisely what is happening in English football – the increase in available transfer funds has not been matched by a growth in the number of world-class players and prices have rocketed.</p>
<p>An alternative example of this is when <a href="https://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe">Mugabe’s government</a> in Zimbabwe started printing its own currency to fund war efforts and pay its debts. A <a href="http://www.newsweek.com/zimbabwes-10-million-bread-84167">loaf of bread</a> would ultimately cost 10m Zimbabwean dollars. Although it would be disingenuous to compare the football industry to Mugabe’s regime (or Kyle Walker to a loaf of bread), the end result in these two situations is not too dissimilar – highly inflated prices.</p>
<p>Price inflation has become more severe in recent years, but it is not new in football. Total spending by Premier League clubs has increased by <a href="http://www.bbc.co.uk/news/business-37231990">approximately £1 billion</a> since the 2006-07 season and has grown continuously since 2011-12. When, then, can this relentless trend be expected to stop?</p>
<p>In short: it will stop when the money supply dries up. The hyperinflation of the football transfer market is a direct result of the landmark <a href="http://www.bbc.co.uk/news/business-31379128">£5.1 billion broadcasting deal</a> struck with Sky and BT Sports. Since coming into effect in 2016, the deal delivers unprecedented levels of income to English Premier League clubs. The deal will cease in 2019 and that is likely to be when spending falls – or at least stabilises.</p>
<h2>There may be trouble ahead</h2>
<p>Financial analysis experts Vysyble recently highlighted concerns over the <a href="http://vysyble.com/blog">economic performance</a> of Sky, the chief financier of the Premier League. It reported that despite a £6.1 billion growth in revenue since 2012, losses have risen by £945m in the same period. The broadcasting giant’s economic losses stand at £208m for the past 12 months alone.</p>
<p>Couple this with a <a href="https://www.ft.com/content/45e8a3e8-4d1e-11e7-a3f4-c742b9791d43">14% drop in viewing figures</a> on Sky’s live channels across the 2016-17 season and this makes for uncomfortable news for Premier League bosses. At this rate, it is inconceivable that Sky will be willing to <a href="http://www.bbc.co.uk/sport/football/31357409">pay £4.176bn</a> again for the privilege of hosting Premier League matches and a reduction in the money supply seems inevitable. This will mean a curtailment of available transfer funds and the fees payed for players should naturally stagnate.</p>
<p>Until then, Premier League clubs will continue to spend record sums of money for all levels of players because they can – and the market dictates that they must. Meanwhile, clubs on the continent are taking advantage of the supply and demand principle and are refusing to sell for anything less than a king’s ransom. Take, for instance, RB Leipzig playing hardball over <a href="https://www.theguardian.com/football/2017/jul/19/liverpool-naby-keita-bid-rb-leipzig-rules-out-sale-jurgen-klopp">Liverpool’s £66m bid</a> for the relatively unknown Naby Keita.</p>
<p>The Premier League, however, is not exclusively an importer’s market. As more players arrive this summer, many others will look to go in the opposite direction. When they do, it is important for English clubs to recoup as much of the money they have spent as possible. The so-called “<a href="http://www.independent.co.uk/sport/football/transfers/premier-league-transfer-news-la-liga-bundesliga-more-money-more-problems-a7837981.html">Premier League premium</a>” English clubs are paying can go both ways – and there is no reason why they should not hold out for similarly huge fees. Leicester City’s <a href="http://www.dailymail.co.uk/sport/football/article-4725234/Leicester-demand-50m-Roma-target-Riyad-Mahrez.html">rejection of Roma’s initial £30m bid</a> and demand of £50m for midfielder Riyad Mahrez is a good example of how to do this. </p>
<p>The transfer madness may well come to an end in 2019 but we can expect it to get worse before it gets better. The hyper-competitive nature of the football business encourages profligacy and, for as long as clubs have the capacity to spend colossal sums, they will. The first £100m transfer by an English club should certainly not be far away.</p><img src="https://counter.theconversation.com/content/81722/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Josh McLeod does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Summer spending across English Premier League football clubs has been jaw-dropping.Josh McLeod, PhD Candidate in Corporate Governance, Heriot-Watt UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/707072016-12-23T07:39:38Z2016-12-23T07:39:38ZIn Venezuela, Christmas is a luxury few can afford<p>Caracas is not feeling the Christmas spirit. The city is desolate. Gone is the cosmopolitan rhythm that even until a few months ago has always characterised it. The city moves slowly, its stores abandoned, residents more focused on resolving basic necessities than with celebrating Christmastime. </p>
<p>Buy a ham, make tamales, string up lights? Those rituals seem irrelevant to many.</p>
<p>It’s been a hard year for Venezuela. Hugo Chávez promised that his “<a href="https://panampost.com/rafael-ruiz-velasco/2016/05/19/21st-century-socialism-has-failed/">21st Century Socialism</a>” would be a luminous moment in human history and a solution to the troubles of the poor. But it more closely resembles the “<a href="http://www.encyclopedia.com/social-sciences-and-law/sociology-and-social-reform/sociology-general-terms-and-concepts/real">Real Socialism</a>” of the last century, with the government of Nicolas Maduro <a href="http://noticiasvenezuela.org/2016/08/26/las-6-caracteristicas-del-fascismo-que-desnudan-al-gobierno-de-maduro">restricting individual liberties</a> and turning citizens into clients of populism that looks everyday <a href="http://www.noticias24.com/actualidad/noticia/24314/el-gobierno-tiene-elementos-comunes-con-el-nazi-fascismo">more like fascism</a>. </p>
<p>Scarcity itself has become a form of social control. With so many Venezuelans spending their days <a href="http://eltiempo.com.ve/venezuela/situacion/el-pranato-no-encuentra-freno-en-las-politicas-del-gobierno/214261">waiting in lines</a> to get <a href="https://www.elcato.org/la-raiz-del-desorden-en-venezuela">food, medicine</a>, and, most recently (and fruitlessly), cash, there’s little time for protest. Christmas carolling and Christmas bonuses have been replaced with <a href="https://www.lapatilla.com/site/2016/12/17/kilometrica-y-agotadora-asi-amanecio-este-sabado-la-cola-en-el-bcv-para-canje-de-billetes-fotos/">interminable queuing</a>. </p>
<p>The government can try to cover up just how bad things have gotten. But Venezuelans know that this year, for many, there will be no Christmas. Holiday spirit just can’t quite overcome the disappointment, hunger, exhaustion and rage. And behold: a country of empty toy stores, bakeries without bread, tamales missing ingredients, and families who can’t visit each other. There’s just not enough money. </p>
<p>In this economy of survival, some of us are lucky enough to eat several meals a day. Others dig through garbage for bread crusts, a veritable <a href="http://www.aljazeera.com/indepth/inpictures/2016/10/face-hunger-malnutrition-venezuela-161007055723064.html">army of the famished</a> who take to the streets every morning and sleep under open skies at night – a daily reminder that we’ve all gotten poorer over the past few months. </p>
<h2>A year without Christmas</h2>
<p>Nobel Prize winner <a href="https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1998/sen-facts.html">Amartya Sen</a> once noted that the world has never seen famine in a <a href="https://twitter.com/AmartyaSen_Econ">democratic country</a>. That’s because, Sen would say, democracy’s system of collective controls contribute to good governance, compelling leaders to change public policies that aren’t working. </p>
<p>It is perhaps early to speak of famine in Venezuela. But thanks to bad policies that have favoured <a href="http://www.pdvsa.com/index.php?tpl=interface.sp/design/readmenuprinc.tpl.html&newsid_temas=28">rent-seeking</a> over productive activities, we indubitably know <a href="http://efectococuyo.com/opinion/en-venezuela-el-hambre-es-mas-que-un-estomago-vacio">hunger</a>. </p>
<p>Venezuela, one of the <a href="http://www.nytimes.com/2016/09/21/world/americas/venezuela-oil-economy.html?_r=0">world’s top oil producers</a>, once underwent an economic diversification process based on <a href="https://www.jstor.org/stable/2502457">import substition</a> to reduce its dependency on oil. Today we are economically dependent, beholden both to oil production and imported goods. We’ve lost the ability to create. </p>
<h2>The nature of the scorpion</h2>
<p>Venezuela has become an <a href="http://www.thedailybeast.com/articles/2016/03/19/the-2-100-year-old-word-for-trumpism.html">Ochlocracy</a> – a government by the multitude – in which the Maduro administration has acted systematically to break people of their will while rationalising decisions based on what it determines to be their “spirit”. This no longer resembles a modern democratic regime. </p>
<p>The government has done <a href="http://www.telesurtv.net/news/Anulan-primera-fase-del-revocatorio-en-tres-estados-de-Venezuela-20161020-0039.html">everything possible</a> to prevent a referendum that could recall president Nicolas Maduro, as the opposition proposed <a href="http://www.bbc.com/news/world-latin-america-37724322">earlier in 2016</a>. </p>
<p>Nor are we likely to have the gubernatorial elections scheduled for December 2016, with the excuse that there’s <a href="https://es.panampost.com/orlando-avendano/2016/10/18/venezuela-cne-pospone-seis-meses-elecciones-de-gobernadores/">no money to hold them</a>. That may be true as far as it goes, but what’s more true is that Venezuela has all but lost its capacity to deal with problems of governance using its democratic institutions. </p>
<p>Still, if this is authoritarianism, it’s an odd kind: it gains strength and maintains its power using democratic formats. Maduro proposes elections (which are <a href="http://www.nytimes.com/2015/12/07/world/americas/venezuela-elections.html">sometimes held</a>) and appeals to the constitution when making (unconstitutional) decisions. </p>
<p>That’s why the <a href="https://theconversation.com/political-dialogue-is-a-lost-art-in-venezuela-and-the-vaticans-intervention-wont-help-68906">Vatican’s peace dialogues</a> could never work (and <a href="http://efectococuyo.com/opinion/referendo-revocatorio-y-dialogo-en-venezuela">aren’t working</a>): like Aesop’s <a href="http://www.aesopfables.com/cgi/aesop1.cgi?4&TheScorpionandtheFrog">fabled scorpion</a>, which ends up stinging the frog that helped it cross the river, Venezuela’s government cannot go against its own nature. </p>
<h2>Less money, more problems</h2>
<p>Christmas shopping is made infinitely harder in Venezuela right now not just because people don’t have enough money (though they don’t) but also because, physically, there isn’t enough money. </p>
<p>In early December the government made the <a href="http://www.panorama.com.ve/politicayeconomia/Maduro-sobre-circulacion-del-billete-de-100-Han-terminado-las-72-horas-sin-prorrogas-20161215-0132.html">surprise announcement</a> that it would be phasing out and replacing certain low-denomination <em>bolívar</em> bills and coins. With Venezuela’s hyperinflation having reached <a href="http://efectococuyo.com/economia/fmi-venezuela-cerrara-2016-con-inflacion-cercana-a-500-y-desempleo-en-20">around 700%</a>, such small amounts have been rendered essentially useless. </p>
<p>Under this <a href="https://informe21.com/economia-venezolana">scheme</a>, the 100 bolívar bill, currently Venezuela’s highest banknote, would be pulled from the market and substituted with 500, 2,000 and 20,000 bolívar notes. The 100 bolívar bills were summarily ditched – but new bills never arrived and no replacements have been put <a href="https://dolartoday.com/se-echo-paatras-venezuela-luego-de-protestas-y-saqueos-maduro-da-marcha-atras-y-anuncia-prorroga-del-billete-de-100-hasta-enero/">into circulation</a>. </p>
<p>It is impossible to understand the reasoning behind this <a href="https://dollarvigilante.com/blog/2016/12/16/war-cash-rages-india-venezuela.html">unannounced, improvised policy</a> that has essentially frozen people’s bank accounts at a time of year when access to funds is most needed. </p>
<p>First, we saw long bank lines. Then, over the past week, as people have been unable to cash checks, make purchases (including Christmas presents) or pay for public transit, complaint has turned to <a href="http://www.reuters.com/article/us-venezuela-economy-idUSKBN1452J1">violent protests and looting</a>. </p>
<p>As I write this article, there’s mixed information about what’s going on in Venezuela. Facing both government censorship and self-censorship, Venezuelans have limited communication and access to information. It makes the already numbing uncertainty and fear worse. But social media is bursting with images of stores being sacked in Ciudad Bolívar, tension flaring en Táchira, mass demonstrations in Maracaibo, and stress in Valencia.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"811260589339267072"}"></div></p>
<p>Venezuela is not a modern democracy experiencing some bumps in the road. It is important that readers understand that the country has gone over the edge, from civilisation to barbarity. We find ourselves with an authoritarian government clinging to power and indifferent to the suffering of its people. This is not how democracy works.</p>
<p>Here’s my Christmas wish list: an economy that’s more efficient and less corrupt, one in which personal interests and business lobbies don’t get privileged access to foreign exchange while citizens can barely pay their bills. And if Santa is taking note, I would also like to restore the separation of powers, the independent judiciary, and the right to protest without indiscriminate, violent reprisal.</p><img src="https://counter.theconversation.com/content/70707/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Miguel Angel Latouche does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Empty toy stores, bakeries without bread and families who can’t travel to be together. This is the year that the government Grinch stole Christmas.Miguel Angel Latouche, Associate professor, Universidad Central de VenezuelaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/593632016-05-13T10:02:52Z2016-05-13T10:02:52ZWhat is Brazilian President Dilma Rousseff’s real crime?<p>Dilma Rousseff, Brazil’s first female president, is <a href="http://www.nytimes.com/2016/05/13/world/americas/dilma-rousseff-brazil-impeachment.html">about to go on trial</a>. She is temporarily suspended from office while Brazilian politicians debate whether she broke the country’s laws.</p>
<p>Her crime is she <a href="http://www.nytimes.com/2016/04/20/world/americas/dilma-rousseff-impeachment-brazil.html">allegedly borrowed</a> about US$11 billion from Brazil’s state banks – about one percent of GDP – to fund long-running social programs for small farmers and the poor while trying to get reelected, which concealed a budget deficit.</p>
<p>The impeachment hearings come amid a <a href="http://www.huffingtonpost.com/entry/brazil-corruption-scandal_us_56fbf5dae4b083f5c6063e80">wide-ranging corruption scandal</a> and an economy that is in tatters. Rousseff is <a href="http://www.cnn.com/2016/05/12/americas/brazil-rousseff-impeachment-vote/index.html">calling it a coup</a> and urging her supporters to march in the streets. </p>
<p>So why is it a crime for the Brazilian president to borrow money from one part of the government – state-owned banks – in order to allow the executive branch to spend more? The answer lies in Brazil’s history of debt and hyperinflation. </p>
<h2>Brazil’s debt problem</h2>
<p><a href="http://english.tse.jus.br/arquivos/federal-constitution">Brazil’s constitution</a> expressly forbids spending money that has not been allocated in the budget and also forbids the government from borrowing money without prior authorization. </p>
<p>Other countries have similar clauses. The <a href="http://www.senate.gov/civics/constitution_item/constitution.htm#a1_sec8">U.S. Constitution</a>, for example, gives only Congress, not the president, the power to borrow money, and the amount that can be borrowed is subject to a <a href="https://www.treasury.gov/initiatives/Pages/debtlimit.aspx">debt ceiling</a> (which isn’t in the Constitution). But beyond that, the document sets no specific limits. </p>
<p>So why does a country like Brazil enshrine in its constitution such strict limits on borrowing and spending? The simple reason is that Brazil has had a very troubled financial history. Past governments have borrowed too much and then been unable to pay off the country’s debts. </p>
<p>Since 1824, <a href="http://www.nber.org/papers/w9908.pdf">Brazil has defaulted</a> on its debts seven times. In roughly one-quarter of all years since 1824, the Brazilian government was either in default or working on restructuring its loans. If Brazil were a person who lived for two centuries, she would have spent about one out of every four years of her life dealing with upset creditors, bill collectors and bankers!</p>
<p>When a country defaults on its debt, it is often shut out of international credit markets. This means that the defaulting country is not able to borrow money. </p>
<p>Argentina, Brazil’s neighbor, last defaulted on its debt in 2001. <a href="http://www.wsj.com/articles/argentina-returns-to-global-debt-markets-with-16-5-billion-bond-sale-1461078033">Argentina was shut out</a> of borrowing from international credit markets for 15 years while dealing with bondholders. It was only able to borrow again starting this past April.</p>
<h2>Covering a shortfall</h2>
<p>Of course, many governments spend more than they take in as revenue. If a government has this kind of shortfall, there are primarily <a href="http://businessmacroeconomics.com/">four methods of handling</a> the situation. </p>
<p>First, the government can cut back on spending so that the books become balanced. Rousseff did reduce government spending after becoming Brazil’s president, but this occurred well after the alleged borrowing. A second way is to increase taxes, fees and licenses so that the government brings in more revenue. This is harder to do because it’s naturally not very popular with voters.</p>
<p>A third way of handling a budgetary shortfall is to borrow money either from locals or people outside the country. This is what Rousseff allegedly did. </p>
<p>Throughout history numerous governments have wanted to spend more money than they take in but for one reason or another were not able to effectively tax their citizens, cut back on spending or borrow money.</p>
<p>That leads to a fourth solution, one that many countries including Brazil have resorted to: print money. This can fund spending in the short term, but in the long run it risks putting the country through hyperinflation – and arguably, this is a worse way to cover a shortfall than borrowing money.</p>
<h2>The scourge of inflation</h2>
<p><a href="http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators">World Bank data</a> show that in 1993, when Brazil’s government deficit was about seven percent of GDP, inflation was over 1,900 percent. The following year, when the country again ran large government deficits, citizens experienced approximately a 2,100 percent annual inflation rate. Two thousand percent annual inflation means items purchased at the beginning of the year cost 20 times more by year’s end. </p>
<p>This kind of inflation robs citizens of their ability to spend money. In countries with high inflation, holding cash, even overnight, can be extremely costly. For example, when an economy has <em>just</em> a 70 percent annual inflation rate, holding cash for seven days means losing about 1 percent of that cash’s value.</p>
<p>As a result, many businesses and people quickly learn that they must keep all cash balances in the bank – even if they plan to use it the next day – to earn interest and avoid inflation destroying the money’s value. Nevertheless, avoiding this wealth destruction is impossible for people who work in restaurants, bars, clubs, theaters and businesses that remain open after banks close.</p>
<p>Inflation of the magnitude Brazil saw in the early 1990s is very similar to theft. It is like theft because high inflation steals the value of a person’s money and leaves people less able to make purchases. </p>
<p>Brazil has tried numerous methods to prevent the government from overspending. For example, it has a special organization called the Federal Court of Accounts, which audits all government spending. The current crisis was triggered when this organization rejected the government’s accounting <a href="http://www.bloomberg.com/news/articles/2015-10-07/rousseff-accounts-rejected-fueling-impeachment-talk-in-brazil">for the first time since 1937</a>, setting legal grounds for impeachment.</p>
<p>So did Rousseff in fact violate the law? Other Brazilian legislators will determine that at her trial over the next few months. </p>
<p>What is especially interesting to me, however, is that while Rousseff is charged with breaking laws that are designed to prevent inflation, her alleged misdeeds did not cause inflation to spiral out of control. During her presidency <a href="http://www.inflation.eu/inflation-rates/brazil/historic-inflation/cpi-inflation-brazil.aspx">Brazil’s inflation rate</a> has been less than 11 percent a year.</p>
<h2>Helicopter money</h2>
<p>At the same time she is charged with these crimes, leading newspapers like the <a href="http://www.wsj.com/articles/what-comes-after-negative-rates-helicopter-money-1460646993">Wall Street Journal</a> and magazines like the <a href="http://www.economist.com/news/finance-and-economics/21697227-get-out-slump-worlds-central-banks-consider-handing-out-cash-money">Economist</a> are suggesting that other countries like Japan and areas like Europe should immediately enact “Helicopter Money” policies.</p>
<p>This bizarre sounding phrase simply means that governments should borrow money from their central banks and use the borrowed money to fund extra government spending, without plans to pay the money back. These articles suggest that political leaders in other countries should enact policies similar to what Rousseff is charged with employing!</p>
<p>Whatever the outcome of Brazil’s impeachment trial, it is doubtful that any Japanese or European leader who enacts the similar policies as Rousseff is charged with using will get impeached. Instead, they might be hailed as an economic savior.</p>
<p>This all makes one wonder, what is really the crime that Rousseff committed?</p><img src="https://counter.theconversation.com/content/59363/count.gif" alt="The Conversation" width="1" height="1" />
Rousseff is about to go on trial for allegedly borrowing $11 billion to fund social programs and conceal a budget deficit. Why is that a crime?Jay L. Zagorsky, Economist and Research Scientist, The Ohio State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/432632015-06-15T12:45:44Z2015-06-15T12:45:44ZZimbabwe ditches its dollar, ending an economic era<p>Zimbabwe dollars will be <a href="http://www.rbz.co.zw/pdfs/Public%20Notices/2015/Demonetisation%20Press%20Statement%209%20June%202015.pdf">decommissioned</a> at a rate of 35 quadrillion per US dollar (that’s Z$35,000,000,000,000,000 for US$1). Any remaining Zimbabwe dollars in circulation after September 30 2015 will be officially, as opposed to practically, worthless. A currency is being ditched.</p>
<p>Withdrawing all Zimbabwe dollar banknotes from circulation officially brings an end to the era of people carrying cash around in large bags and even wheelbarrows to do their everyday shopping. In 2009, the end of the decade long recession saw the government adopt the US dollar as its main currency. <a href="http://www.standard.co.uk/business/business-news/zimbabwe-recalls-currency-offers-5-us-for-175-quadrillion-zimbabwean-10315336.html">Since then</a> people have effectively used US dollars or South African rand in everyday life, while an increasingly small number of Zimbabwe dollars (with virtually no value) remained in circulation.</p>
<h2>Historical precedent</h2>
<p>Zimbabwe adopted the Rhodesian dollar in 1970, following decimalisation and the replacement of the pound sterling as the currency. At the time of independence in 1980, the Rhodesian dollar was replaced by the Zimbabwe dollar, which was then worth US$1.50. Since then, rampant inflation, corruption, unresolved <a href="http://www.rbz.co.zw/pdfs/2014%20MPS/Jan%202014%20MPS.pdf">infrastructure bottle necks</a>, President Robert Mugabe’s controversial land reform programme and general economic mismanagement have led to the collapse of the economy and a severely <a href="https://webbrain.com/brainpage/brain/3A6128E1-B147-1629-BCE6-B673CD1C7CB1">devalued currency</a>, with many organisations using the US dollar instead. </p>
<p>The 20th century saw several <a href="http://www.cato.org/publications/commentary/hyperinflation-mugabe-versus-milosevic">other examples of hyperinflation</a> making banknotes worthless – notably Germany in the 1920s, Brazil in the 1980s, Argentina and Angola in the 1990s. In Zimbabwe the highest monthly inflation reached 79,600,000,000% in November 2008, with prices doubling every 25 hours. This was just short of Hungary’s record, where the highest ever monthly inflation reached 41,900,000,000,000,000% in July 1946 (and the highest denomination bill was 100,000,000,000,000,000,000 or one hundred quintillion pengo).</p>
<p>Once stability returned, most countries redenominated prices by introducing a new currency: Germany introduced the reichsmark in 1924, Brazil the real in 1994, Mexico the nuevo peso in 1993 (and back to peso in 1996). In these cases demonetisation was effectively a process of redenomination – where the value of banknotes are changed, partly out of accounting convenience and partly to signal the arrival of a new era of more stable economy.</p>
<h2>Stand out case</h2>
<p>Zimbabwe’s process of hyperinflation and scrapping its currency, however, <a href="http://www.bbc.co.uk/news/world-africa-26034078">stands out</a>. For one, Zimbabwe had previously redenominated its currency in 2006 (1 revalued dollar = 1,000 old dollars), 2008 (removing another ten zeros) and 2009 (removing a further 12 zeros). Plus, the 35 quadrillion per US dollar exchange rate at which the Zimbabwe dollar is being decommissioned is certainly mind-boggling when compared to today’s relative stability in other emerging currency markets.</p>
<p>But more interesting is that Zimbabwe has multiple currencies as legal tender alongside the Zimbabwe dollar. First the US dollar in 2009. Then in 2014 the Reserve Bank of Zimbabwe introduced a <a href="http://www.zimbabwesituation.com/news/zisit_zim-widens-multi-currency-basket/">mix of currencies</a>, using those of its neighbours as well as some major trading partners. Specifically the South African rand, Botswana pula, pound sterling, euro, Australian dollar, Chinese yuan, Indian rupee and Japanese yen.</p>
<p>While different currencies coexisting during precarious economic conditions is not rare, the combination of multiple currencies as legal tender is unusual. Most other countries that have given up on their local currency adopted a strong foreign one as the new money. </p>
<p>For example, Panama, Ecuador and El Salvador became fully dollarised economies in 1904, 2000 and 2001, respectively. By adopting the US dollar as legal tender they pass on the control of their money supply to the US treasury, limiting the government’s control over its economy.</p>
<h2>Multiple currencies</h2>
<p>Adopting multiple currencies could have been an act of economic desperation. Initially the move would have brought more cash into circulation, as a liquidity crisis meant some banks had stopped lending, making imports difficult. But it also institutionalised practices where merchants in the capital Harare priced their goods in US dollars, visitors to the Victoria Falls paid South African rands, while miners traded in Australian dollars.</p>
<p>Now there are eight currencies that constitute legal tender, excluding the Zimbabwe dollar. This means that there is the possibility of seeing prices quoted in US dollars, but you can pay in any of the acceptable currencies. For instance buying dinner in euros and receiving a combination of Chinese yuan and Indian rupees in change. </p>
<p>This might not happen often, but merchants will generally accept multiple currencies, knowing they can put them to the government. The issue of what exchange rates the merchants will impose remains open, however. A cell phone app with up to date FX rates will be a necessity for anyone living, working or even visiting Zimbabwe. </p>
<p>Eventually, Zimbabwe is likely to have to choose one currency to proceed with, as juggling eight different ones is unsustainable and administratively costly. The US dollar is probably the most likely outcome. But one is left to wonder whether the Zimbabwe dollar might make a comeback in the near future (or after President Mugabe gives up power).</p><img src="https://counter.theconversation.com/content/43263/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bernardo Batiz-Lazo has received funding to research ATM and payments history from the British Academy, Fundación de Estudios Financieros (Fundef-ITAM), Charles Babbage Institute and the Hagley Museum and Archives. He is also active in the ATM Industry Association and is a regular contributor to <a href="http://www.atmmarketplace.com">www.atmmarketplace.com</a>.</span></em></p>Zimbabwe dollars are being decommissioned at a rate of 35 quadrillion per US dollar, with eight alternative currencies to choose from.Bernardo Batiz-Lazo, Professor of Business History and Bank Management, Bangor UniversityLicensed as Creative Commons – attribution, no derivatives.