Letter to the FM editor

We sent this letter to the editor of the Financial Mail in response to one of the columnists in today’s publishing.

Dear Sir,

Ratsoma: not getting it

Ratsoma: not getting it

The basic premise of Monale Ratsoma’s article entitled “Growth vs Inflation” (On My Mind, January 8) harbors a critical economic fallacy and a surely embarrassing contradiction. The fallacy is that inflation and employment are a trade-off. As for the contradiction, Ratsoma says “Gill Marcus correctly points out that inflation destroys wealth, with the poor being the most vulnerable.” His statement shows he agrees that inflation (whatever his definition of it may be) impoverishes society. Anything that destroys wealth necessarily contributes to rising poverty. And yet Ratsoma’s article is actually making a case for more inflation!

But let’s get back to the fallacy: Without getting too technical, it is possible to temporarily create jobs in the economy through an increase in the money supply and credit out of thin air via a lower repo rate and greater bank lending, but only until the rise of real incomes is inevitably wiped out by the inflationary wealth destruction Ratsoma describes. The funny thing about the short term is that it comes to an end rather quickly, and sometime in the past decade we passed the point where wealth destruction through inflation started outweighing income growth, and real incomes began falling (particularly fast for the poorest). The endgame of this continuous self-defeating process of using inflation to remedy the impoverishment brought on by inflation is a total destruction of the wealth of the working and middle classes. The surge in jobs during the credit boom followed by the obliteration of jobs in 2009 is a textbook example of why credit-driven growth never lasts. There is no restoration of real incomes when inflation is the name of the game. Yes, our leaders were sucked in by policy developments in major global economies, but judging by debates raging among our technocrats, there will be no end to inflationary policies. They all want to jump, but just need to agree on how high.

Ratsoma ends his article with: “Which, for this group [of poor South Africans], is the bigger evil, unemployment or inflation? At this level, most would opt for their jobs to be protected over the curbing of a few inflation percentage points, because unemployment is a bigger problem than inflation could ever be.” “Could ever be” is a long time and long term arguments don’t play into the hands of inflationists like Ratsoma. I think any Zimbabwean would tend to disagree with Mr. Ratsoma’s ivory tower theoreticism, for they had to deal with, as did South Africans in 2009, a loss of jobs and inflation at the same time. And don’t think it can’t happen to us again here in Southern Africa.


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