Even though the Presidential election is over and all of the accompanying hyperbole has ceased, the future of the U.S. economy is still on the minds of many. A poll taken by Fox News prior to the election reported that the #1 concern among voters was not jobs but rather price inflation. In the face of that citizen concern, the Federal Reserve is pursuing the worst possible course of action—QEfinity (the most recent iteration of Quantitative Easing—the expansion of the currency supply by buying up U.S. government debt from banks). If you don’t believe us that it is indeed the worst possible course of action, witness Zimbabwe.
Dr. Gideon Gono was first appointed Governor of the Reserve Bank of Zimbabwe (RBZ) in 2003 and was reappointed to his post with a new five-year term beginning in 2008. Many found Gono’s reappointment astonishing, given that Gono reigned over what is arguably the worst episode of hyperinflation the world has ever seen.
Gono’s monetary policies from 2003 and until recently depended on the continued printing of Zimbabwe dollars (Z$) to help build liquidity in the otherwise depressed economy. As expected and predicted by most global economists, Gono’s policies resulted in a devalued Z$ and the attendant hyperinflation.
The first indications that the wholesale printing of Z$ was having an adverse effect on the Z$ came in August 2006:
Despite all the machinations of the RBZ, or rather because of these manipulations, the Z$ finally met its end in 2009 when the one-hundred-trillion note was issued. That’s right, one-hundred-trillion.
Shortly after the issue of this note, the RBZ once again attempted to save the Z$ by redenominating it and issuing the fourth version of the currency by dropping off 12 zeros. This time, though, Zimbabweans would have nothing to do with it, and the currency was abandoned in favor of a multi-currency system, in which citizens simply saved in and transacted in whatever currency they felt served the situation best; whether dollars issued by the Federal Reserve, South African rand or British pound. The people of the U.S. deserve this same freedom. See Free Competition in Currency Act Gives Americans Freedom of Choice.
If you remember the definition of quantitative easing, you may recognize the actions and policies of Gono.
Having suffered through the catastrophic results of his own country’s money printing policies, Gono has now come to see, and to publicly state, that QE can and will lead to a devalued purchasing power of currency and is likely to generate hyperinflation (a total loss of confidence in the currency as a store of value). Ironically, having experienced up-close and personal the dangers of QE, Gono, who has been jokingly referred to as Fed Chair Ben Bernanke’s mentor, recently commented on the Fed’s decision to implement QE3:
But could Zimbabwe-type inflation really happen in the U.S? Of course it could. Even though the world’s elite central planners, Ben Bernanke included, will try to convince us that the U.S. is stronger, smarter and, well, more special than nations such as Zimbabwe, if Gono recognizes the inherent similarities between his ill-fated policies and those of the Fed, surely our state economists can do the same.
Furthermore, if the policy of inflation via printing (QE) lead to disaster time and time again throughout history, what has Gono decided is the best manner to manage national currency?
“There is a need for us to begin thinking seriously and urgently about introducing a Gold-backed Zimbabwe currency which will not only stable but internationally acceptable,” he said in an interview with state media.
“We need to re-think our gold-mining strategy, our gold-liberalisation and marketing strategies as a country. The world needs to and will most certainly move to a gold standard and Zimbabwe must lead the way.”
Gono said the inflationary effects of United States’ deficit financing of its budget was likely to impact other countries to leading to a resistance of the green back as a base currency.
“The events of the 2008 Global Financial Crisis demand a new approach to self reliance and a stable mineral-backed currency and to me, Gold has proven over the years that it is a stable and most desired precious metal,” Gono said.
“Zimbabwe is sitting on trillions worth of gold-reserves and it is time we start thinking outside the box, for our survival and prosperity.”
So the man who compelled the printing of the hundred-trillion dollar banknote has turned to the time-honored stability and the accompanying market-based price mechanism of allocating resources? As George Shaw derived from Marcus Cicero:
Of course, the idea of a gold-backed note is not new, and got Libya bombed from the north. Thankfully Zimbabwe has little sweet light crude to exchange in their new and righteous demand for a sound money base upon which to rebuild. We await more good news as it spreads.