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Commentary>Self-fulfilling exchange rate instabilityWilberne Persaud - Financial Gleaner Columnist |
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John Maynard Keynes in his book 'Economic Conse-quences of the Peace' discussed the virtual impossibility of Germany to meet reparations payments the victors imposed after the 1914-1918 war.
Their concerns didn't really centre on reconstructing economic life as the foundation of the peace.
Keynes argued, "Reparation was their main excursion into the economic field".
Assessing prospects for renewed production and exchange he thought post-war Europe's currency situation - the inflation problem - was a key.
His sharp, insightful, often sardonic indictment of the settlement is highly instructive; well worth careful periodic re-reading.
"Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some," he wrote.
"The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their desserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat.
Utterly Disordered
"As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery."
"Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
Keynes decided to use his huge influence to avoid the destruction. Some may argue with him on moral or ideological grounds, but realism played a big part in his comments.
He was convinced that the "immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a society where wealth was divided equitably.
The railways of the world, which that age built as a monument to posterity, were, not less than the pyramids of Egypt, the work of labour which was not free to consume".
So much for the egalitarian society!
But why should this be of any interest in today's Jamaica? Not too difficult a question to answer really.
Jamaica imports almost all its energy needs, fertilisers, chemicals, pesticides, corn meal, sardines, animal feedstock, motor vehicles of all sorts and almost all manufactured capital goods - the list may be extended but there's no need.
Debilitating Consequences
The point is clear. To the extent that our currency fluctuates, for us it means devaluation and inevitably rising prices. To use Lenin's idea and Keynes' term the currency is debauched with debilitating consequences.
A fixed exchange rate is impossible to maintain independently of fiscal discipline except in very special or unique conditions.
No economic or political expert describes United States policies over the past decade as fiscally disciplined. Clinton-era surpluses have been converted into trillion dollar deficits. But the US dollar still generally holds its own because of unique circumstances.
No other country in the world can do this.
Fiscal Indiscipline
Even so, there are other consequences attendant upon fiscal indiscipline and changed economic power relations in the world as they affect management of the international system.
As I write this, there is soon to be a meeting of Brazil, Russia, India and China the so-called 'BRIC' countries to discuss their lowly status in the International Monetary Fund (IMF).
Belgium has more say in the IMF than China now has.
But I digress. Jamaica's exchange rate regime is one that allows for debauching of the currency. It seems to be agreed too, by most commentators, that the fundamental problem is one of fiscal and on occasion monetary indiscipline. Causation agreed, some argue for a fixed exchange rate as the solution going in the extreme, to dollarisation.
Their principal concern seems to be that as "inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery."
Sorry to have to repeat it!
Add to this the fact that peoples' expectations feed a self-fulfilling instability.
What is never highlighted, however, is the fact that as price increases follow exchange rate devaluation governments can always blame it on the exchange rate mechanism.
It has nothing to do with underlying policy choices. There is, therefore, no immediate political backlash - the population does not finger government policy as a key contributor to devaluation and price increases.
Underlying Conditions
Economists know and no longer debate the fact that a flexible exchange rate does not mean an unstable exchange rate! It is the underlying conditions that determine whether 'flexible' turns out to be 'unstable'.
Once there is commitment to a fixed exchange rate, the link between fiscal discipline and exchange rate stability becomes firmly established. There is likely to be more, not less pressure on government to operate within some defined levels of fiscal discipline.
Yet there are others who conclude that a fixed exchange rate is impossible before curbing our addictive habit, our chronic disease of evaporating money on politically convenient but economically disastrous budgetary allocations and cost overruns.
Are we here confronting the chicken or the egg?
We don't need anyone to tell us what every female head of household knows about budgeting, what they tell us in all the surveys that pose the question of prudential budgeting.
Ask the Planning Institute of Jamaica or the Statistical Institute of Jamaica.