Dear Dr Gono,
WE have a new problem in Zimbabwe that I have seen before in the United Kingdom.
I think it would be a good idea if you could use your good offices with the president to explain
something that may undermine your entire economic revival programme. I believe that we are in danger of inventing a new form of inflation.
It is not new actually, but I have given it this name in this particular instance: “domestic worker inflation”. I have seen this before.
I will explain now how it worked in the UK, and I have been told by employers that it is already working in the same way here in Zimbabwe. In case it is too late to remove this threat I am also drawing your attention to my Plan B. But this is applicable anyway.
For your information, I was a respected “practical economist” in the UK for many years. I was called in by the UK treasury in the 1980s to explain how I had got it right in telling them exactly when the inflation of that time was going to take off whereas only one other person had managed to do that.
The answer was simple: I saw that school leavers were now demanding double the usual starting salary —and getting it. This meant that those in the next grade wanted matching wage rises and were clearly going to get something to maintain differentials.
This worked all the way up the scale and fed into house prices and the amount needed in income terms in order to buy a house. The social and economic pressures were not of the kind that could be opposed by a tight monetary policy unless a severe recession and a significant increase in bankruptcies and unemployment was to be accepted as the price.
In the case of the UK, the cause had been a belief in the treasury that delays in the response to changes in money supply had vanished. I was personally told this by Peter Lilley, then permanent secretary to the UK treasury, in his office.
He was ignoring and over-ruling my timely advance warning. He was not listening — he mainly wanted to defend his policy. So they carried on and allowed money supply to expand too long and too much, presumably leading to full employment and the school leaver demands.
In the case of Zimbabwe, we now have domestic worker inflation to set things off. If the president still wishes to enforce this policy of giving domestic workers rises that are far out of line with, for example, factory workers and security guards, then we will suffer one of two fates: a significant rise in unemployment and bankruptcies triggered by an opposing tight monetary policy, or renewed high inflation as everyone asks for a corresponding wage rise either to pay the domestic workers or to keep pace with differentials.
If the latter takes place then I can only suggest that full attention be paid to the work that I am doing at an earlier date than otherwise. It is in respect of creating an economic structure that can assist with the rapid reduction in inflation without creating a lot of unemployment. It would work best when this stimulus has run its course and it is time to bring it down.
In the meantime, it is a structure that will allow everyone to borrow and to save without the usual degree of problems associated with high and rising inflation with the corresponding, but necessary, high interest rates.
The initial part of the plan is to introduce a carefully designed new lending system. There is no risk of this lending system capturing too much of the national savings available. But this needs to be discussed to ensure that aspect is managed, if or while the plan is restricted in scope. There are some simple solutions.
If adopted by other nations, the wider plan would have some of the same benefits in the developed economies of Europe and the United States, which is why some articles are beginning to appear in the international press. Basically the measures are needed to harmonise the economy, making it easier to manage.
Some things are allowed to grow exponentially, like gross domestic product, tax revenues, profits, compound interest, prices and rentals, for example, while others like loan repayments, fixed interest bonds, taxation and accountancy are geared to a fixed value of money that is unattainable. This causes instabilities.
On this basis my work is said to be groundbreaking and it can be shown to be safer to implement the changes than to play “safe” and not to do so. A gradual implementation would seem to be a likely outcome, but a faster implementation would seem to be important now that we have yet another potential crisis to deal with, as above.
I have worked on this for a number of years assisted by experts from three nations and a senior central banker in a private capacity. We have now reached the stage where the plan is practical to implement. Full and in-depth workshops, to be led by myself and my team, are currently being prepared, introducing all of this for the benefit of governments, central banks and financial institutions around the world.
Properly managed, our economy can expand rapidly at 8% per annum or more without the need for international aid or new loans from the International Monetary Fund.
May I suggest that we start discussions? I have a four-paragraph summary to show you.