Monday, June 25, 2007

"If inflation Was Good What About Zimbabwe"

The following article was a response to Teddy Sseezi-Cheeye’s opinion that inflation was good for the economy, Uganda's Daily Monitor (Feb 16, 2007).

***

Please allow me to express my views on Teddy Sseezi-Cheeye’s article on inflation (Sunday Monitor, Feb 8).

First, inflation is among the least understood but most discussed economic trends. Economists and common people alike fall into the trap of confusing consequences of inflation with inflation itself. Cheeye’s article was not different. He, for instance, referred to inflation as the general rise in prices. This definition is not complete.

Inflation is correctly defined as the oversupply of money and credit, which causes market prices to rise. It should be understood that excessive money supply leaves people with more cash to spend. But because the quantity of goods supplied stays relatively constant, the economy is left with too much cash but with few goods to purchase. This forces consumers to bid on market prices, . . . like they do during public auctions. This results to rapid increase in prices of goods and services, which ends when the central bank stops printing extra currency (inflating). Ugandans experienced such a situation in 1980s. It’s not until Ugandan money supply was stabilized in 1990s that the economy started to recover.

Second, Cheeye portrayed inflation as the economy’s best friend. I kindly beg to differ. If this claim was true, Zimbabweans, who are crying over their 1,000% inflation rate, would be the happiest people on earth.

Third, I was shocked by Cheeye’s justifications for increasing both money supply and government borrowing. His reasons went against the very macroeconomic principles he was trying to address. I wish he could read the book “Economics in One Lessonby Henry Hazzlitt. It’s a very short economics classic that can be downloaded from the Foundation for Economic Education’s website (www.fee.org).

9 comments:

alexcia said...

Kenyanomics,

I did not read this particular article but as usual you're straight on point.

A small addition, inflation has become harder to define as production technology/efficiency has increased and impact of low cost manufacturing countries such as China come into play.

Oversupply has become the norm.

The result is that when there is too much money in the economy, consumer prices remain stable but asset prices (stocks and real estate) rise rapidly

Ssembonge said...

Do you have the link to the article? What type of inflation is he referring to? Supply side or demand side?

Zimbabwe doesn't have inflation. They have hyperinflation!

MainaT said...

More locally, one thing that has surprised me in Kenya is that inflation seems off the menu of most commentators. Kenya is suffering from both types of inflation with an asset bubble as well as consumption goods. That is the real reason, the common mwananchi is not yet enjoying the benefits of the of the last few yrs of economic growth.

inspectordanger said...

I agree with ssembonge, Zimbabwe is having hyperinflation. A runaway inflation is definitely not desirable nor beneficial. For mainat, it takes time for economic growth benefits to trickle down to mwananchi. But I fear that it may just make the rich richer.

alexcia said...

Kenyanomics

I realise none of our comment went to the heart of your thesis "Inflation is correctly defined as the oversupply of money and credit..."

I guess this is one of those battles that layman's english usage has won over the academician's jargon

see http://en.wikipedia.org/wiki/Inflation

Kenyanomics said...

Ssembonge and InspectorHatariSana--Hyperinflation is just "Inflation on Steroids." I used the latter term for simplicity purposes.

SSembonge--UG Monitor has no archives. I could not link to both Cheeye's article and my opinion piece.

MainaT--Excellent observation. Financial bloggers have concentrated too much on the stock market. What about a joint post between Kenyanomics and Kenya Capital Investment Group?

Alexcia--There actually exists an intellectual battle bettwen different schools of economic thought. My explaination has an Austrian School persuation.

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MainaT said...

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