Gideon Gono Gives Up The Ghost

Joachim Fels and Spyros Andreopoulos, Morgan Stanley Global Economic Forum

Poor Gideon Gono. He gave it the old college try, but that just wasn't good enough.

Gideon Gono, in case you aren't familiar with the name, is (or at least
was) the head of Zimbabwe's central bank. In local circles he is known
by his nickname, Mr. Inflation.

The Mr. Inflation moniker is due to certain eyebrow-raising measures
Mr. Gono has taken, like issuing bank notes worth Z$100 trillion (How
many zeroes in a hundred trillion? Fourteen?) in a futile attempt to
ease the country's chronic cash shortages.

When 14 zeroes don't do the trick, you know it's time to give in – and that's what the country has done.

Zimbabwe abandons its currency, the BBC reported on Thursday.
Zimbabweans will be allowed to conduct business in other currencies,
alongside the Zimbabwe dollar, in an effort to stem the country’s
runaway inflation.

Failure is never fun, but don't feel too sorry for Mr. Gono. Being a
connected member of Zanu-PF (the ultra-corrupt political party that has
driven Zimbabwe into the ground), he has a 47-bedroom mansion to
console him. No doubt he also has a well-padded slush fund… held in
something other than Zimbabwe dollars.

Not-So-Crazy Talk

In an interview with Newsweek a few weeks back, Mr. Gono explained his
actions to the outside world. What was frightening about the interview
was not the degree of crazy talk – of which there was some – but the
more sober aspects of the exchange.

Consider this excerpt:

Newsweek: Your critics blame your monetary policies for Zimbabwe’s economic problems.

Gono: I’ve been condemned by traditional economists who said that
printing money is responsible for inflation. Out of the necessity to
exist, to ensure my people survive, I had to find myself printing
money. I found myself doing extraordinary things that aren’t in the
textbooks. Then the IMF asked the U.S. to please print money. I began
to see the whole world now in a mode of practicing what they have been
saying I should not. I decided that God had been on my side and had
come to vindicate me.

Hmm. Some of that language rings familiar. Where else have we heard
about central bankers doing extraordinary things that aren't in the
textbooks?

Isn't that, in fact, both the main line of defense and the main source
of hope behind the West's now-unfolding mass Keynesian experiment…
the idea that the degree of money-printing, asset-buying and
stimulus-funding we now witness with slack-jawed awe is
extraordinary, such non-textbook measures having never before been
tried?

Maybe what Mr. Gono (a.k.a. Mr. Inflation) is telling us is that such
measures have been tried… and they didn't work out very well…

Uncomfortable Parallels

The United States is not Zimbabwe, of course. Uncle Sam's regime is a
heck of a lot more stable. And Gideon Gono never had the privilege of
printing the world's reserve currency.

All the same, one has to wonder. Are the basic conditions that stoke
the flames of hyperinflation – political instability, adverse economic
shocks and chronically high fiscal deficits – really so far from the
West's doorstep?

In an interview with Barron's last month, money manager Rob Arnott made a modest case:

How can we get out of this current mess without renewed inflation? A
lot of folks are deeply concerned about the risk of deflation. The
temptation is to look at history, especially the Great Depression,
which was a deflationary depression and which started with a very, very
low national indebtedness. If you have very little debt and you have a
depression, it is likely to be deflationary. The contrast with Germany
in the 1920s is noteworthy; they had massive indebtedness and
hyperinflation. I'm not suggesting a risk of hyperinflation. But I am
suggesting that people are too glib about tossing aside the risk of
inflation, which was front and center less than six months ago for most
investors.

That Hideous Strength

As your humble editor has said before in these pages: When it comes to
rapid money creation, the U.S. Federal Reserve reigns supreme. In terms
of sheer scale and scope, nobody but nobody prints like the U.S. of A.

Here and now, though, there are at least two reasons traders are
complacent about the dollar's fate. One, because the greenback remains
visibly strong; and two, because Fed Chairman Bernanke is still
wrestling with a deflationary grizzly bear.

 

There's no arguing with the chart. Given the current climate, traders prefer greenbacks.

This is, in large part, because Europe looks to be at risk of cracking
up. Riots on the continent threaten to make France look like Greece
(where things got so bad the police ran out of tear gas), and Britain
is staring down the prospect of bank losses larger than the country's
entire GDP. (Some wags have begun newly referring to London as
Reykjavik-on-Thames – though it seems a touch early for Iceland
comparisons.)

Add in Moody's threat to downgrade Ireland's credit rating, Spain in
the grips of a vicious housing bubble unwind, and more troubles
building up in Italy and the Eastern bloc, and what you get is a euro
on the outs.

Then further season the stew with ongoing global economic fears, a lack
of certainty as to when growth will resume, and an increasing
likelihood that Japan will devalue a too-strong Yen, and you wind up
with a situation where the U.S. dollar is the only freely traded major
currency alternative left standing. (Besides gold, that is.)

Cracks in the Dam

But you've got to wonder (or at least I do)… is it really a good
thing, in the long run, for the Fed and Treasury to be given even more
rope to hang themselves?

Think about how we got into this mess – this global mess – in the first
place. At root, U.S. consumers were given too much credit and Wall
Street was given too much trust. In both cases, the appearance of
stability led to a dramatic build-up of pressures beneath the surface.

The U.S. consumer has never pulled back, we were reminded, and U.S.
house prices have never gone down. These were key rationales for
letting the bubble get bigger and bigger before its 2007-2008 burst.

Now, with the greenback looking good in a relative paper sense, it's
easy to see the Fed and Treasury employing a similar line of logic.
Why not print more, Bernanke and new man Geithner can say, when the
print-fest thus far has had no ill effects?

Furthermore, there is a similar hidden pressure problem embedded in the Fed's deflation-fighting efforts.

Imagine, if you will, the present gloom-and-doom outlook as a sort of
deflationary dam holding back the waters of credit – waters desperately
needed to refresh the economy. (The refusal of the banks to dole out
their cash, in fact, is very much like a giant lending dam.)

In order to get liquidity to the people, the Fed (with the help of the
White House) will have to break through this deflationary dam via
sheer, unadulterated force. (At heart, that is really what these
unprecedented Keynesian measures are all about.)

But what happens when the deflationary dam has well and truly smashed,
giving way to inflationary flood? After you've ginned up a boiling
river, how do you turn off the taps?

On that score, I doubt Ben Bernanke has any more of a clue than Gideon Gono.

That's why I suspect the extraordinary measures being taken by the
Fed now could prove even more extraordinary in their aftermath… and
why I prefer the long-term prospects of countries with assets on hand
rather than debts.