RICHARD J GRANT: Worse than mere inflation
Rising prices in SA in 2022 are less likely to be caused by monetary inflation than by the continuation of a cluster of poor policies
In recent months people around the world have become increasingly conscious of rising prices, especially for their daily necessities. When price increases are persistent and broad enough to cause the consumer price index (CPI) to rise, we call that “inflation”. In the US and parts of Europe, an entire generation has grown up without much awareness of inflation, until now. But few South Africans can remember a time when inflation was low enough to be of little concern.
Throughout history governments have been tempted by their power to debase or inflate the currency to redistribute wealth from the holders of currency to the recipients of newly created currency. That is a fancy way of saying that governments use monetary inflation (the creation of more money) as a form of taxation that does not require the co-operation, or even the awareness, of those who are taxed.
As long as the taxpayers are sufficiently productive that their output increases at least as fast as the government inflates the currency, then prices will generally appear to be quite stable, and we all tend not to think much about inflation or the inflation tax. But that has not been the case for most of the past two years: lockdowns and vaccine mandates have disrupted workplaces and supply chains to a punishing degree. Millions of working hours of lost or misdirected productivity have imposed losses throughout society that can never be regained, just as time itself can never be regained.
None of this can be blamed on a coronavirus any more than we could blame the annual flu season. These disruptions to our productivity, and to our social relations, have been caused by governmental reactions to the perceived threat of a coronavirus. But we would be fools not to notice government officials using this opportunity to expand their powers and to redistribute wealth to their key supporters and, ultimately, to themselves.
Since the great inflation of the 1970s and 1980s it has come to be generally understood that inflation is “always and everywhere a monetary phenomenon”. That remains true in our current season of inflation. It is certainly true in the US, where heavy-handed lockdowns (of uncertain legality) imposed by state and municipal governments precipitated demands for compensation. This motivated enormous increases in federal government spending that magnified an already large budget deficit and created a flood of new US government bonds that would have pushed up interest rates had the US Federal Reserve not stepped in to purchase, and thereby monetise, most of that new debt.
The current bout of American inflation began in mid-2020, but the monetary impulse was matched by a recovery from the worst of the lockdowns and a return to what had been a strong and optimistic economy. Price rises also tend to lag the monetary cause, but in 2021 a new US administration imposed expensive new policies that further disrupted social relations, labour supply and supply chains. What would have been a relatively brief burst of price inflation has been augmented and prolonged by the deleterious policies of the new administration.
The situation in SA is similar, except SA inflation has been persistently higher than in America, until now. For most (not all) of the past 30 years inflation has been on a downtrend, and the depreciation of the rand against the US dollar and commodity benchmarks has slowed. The current uptick in price inflation is partly of monetary origin. During 2020, government expenditure increased by 12% over the previous year and the assets of the SA Reserve Bank rose by a similar percentage. Debt was monetised.
Since mid-2020, however, SA monetary policy has been distinctly non-inflationary. Through 2022 price rises are less likely to be caused by monetary inflation than by the continuation of a cluster of policies that have been depressing productivity, misdirecting resources and destroying social relations. Lockdowns are just the latest and most obvious destroyer of wealth, adding insult to the injury of wasteful government spending, excessive and distorting regulation, and the corruption of governmental and administrative institutions. Such insidious governance can take a country in only one direction — and ultimately no such regime can maintain its legitimacy.
Since the beginning of 2020 the number of people employed in SA has declined by 10%. That is 2-million fewer people employed. Can anyone seriously argue that those people are now making a greater contribution to human wellbeing than they were before? If not, those people’s potential contribution has been lost forever. When people lose their right to associate freely, to travel without confrontation and to steward the fruits of their labour, no-one should expect them to maintain their civility — or anything that resembles a civilisation.
• Dr Grant is professor of finance & economics at Cumberland University, Tennessee and a senior consultant to the Free Market Foundation. He writes in his personal capacity.
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