Japan has been in persistently mild deflation since the early
1990s, the USA and the EU are on the cusp of the ‘dreaded’ deflation with
alarmingly low interests of below a percent still declining. Deflation occurs
when prices are declining over time which is the opposite of inflation. It is a
revaluation of a currency and when there is too little money for the needs of
the economy that means the nominal price of goods and services goes down. Over
time money becomes more valuable than the other goods in the economy. There
will be more goods available but not enough money to buy these goods. Producers
respond but streamlining production and to cater for this reduction in productions
jobs will have to go. With deflation as the supply of money goes down, the
supply of other goods goes up, demand for money goes up and demand of other
goods goes up as well. The supply of goods and services rises faster than the
supply of money. That belief that the value of money will decline in future
constrain investment and the anticipation of cheaper prices in future stifles
consumption is what causes deflation.
The liquidity crunch could be a symptom of a deflationary spiral
for Zimbabwe. Demand has been running persistently below the economy’s capacity
to meet supply demands, prices and incomes have continued with the downward
slide which has further weakened the demand. This trend is not good for the
economy because a fall in prices and incomes arm-twists consumers to cut down
their spending. The producers who are already producing at below capacity have
in turn responded to low sales by keeping nominal wages low. With deflation if prices
continue to fall, reducing nominal wages will have minimal impact and instead
most companies end up reducing their wage bill by laying off workers. Zimbabwe
is in a difficult position because the country cannot devalue and as such
prices and wages must rise gradually. The effect of reduction in production due
to capacity problems is reduction in consumer spending which is a recipe for even
more damaging gloomy downward escalation. In countries where governments can
print their own money this does raise solvency concerns and in Zimbabwe it is
not possible. The Reserve Bank is supposed to stimulate spending by reducing
the real interest rate which is the nominal interest minus the rate of
inflation. This has the effect of stimulating enterprise and hampers savings
thus reducing the GDP output gap which is the difference between the actual GDP
or actual output and potential output.
The Zimbabwe government could stimulate demand and possibly nudge
inflation up again by initiating larger new spending or reducing taxes and the
Reserve Bank could buy the bonds used to finance the resulting deficit. So if
the Reserve Bank reassures investors and the public that it would keep these
bonds this is likely going to bring about fiscal stability.
Money does not have any inherent value as it is simply pieces of
paper or numbers. A house has value because it provides shelter and food has
value because it has a use value, if you don’t eat you eventually die of
hunger. Money is good with a limited supply and there is demand for it because
people want it to buy goods and services. Goods and services are integral to
any economy hence GDP is a measure of the value of goods and services in any
country. Thus money is a way that allows people to give up goods and services
which are less desirable to them and to get those that are more desirable to
them. This is about a natural set of beliefs that money will always have value
in the future. If people believe that money is likely to lose value in the
future they are going to get rid of their money fast. This is what gives rise
to inflation. People are rational beings, if money is going to have less value
in future they get rid of it and that can be bad for the economy. If people
lose faith in the money supply and believe that it will be worth less in future
then the economy will stop functioning. Money is just like goods and services
and is governed by the same rules of supply and demand. The value of any good
or services is determined by its supply and demand and the supply and demand
for other goods in the economy.
Deflation is a symptom of other problems or underlying problems in
any economy. However it is not necessarily bad if businesses are in a position
of being able to continue to produce goods at lower prices due to cost-reducing
initiatives and gains in efficiency. To start off with consumers purchasing
power increases due to falling prices until money supply diminishes. The
problem with deflation is that it is difficult to come out of once the spiral
in decline starts, business profits decline, unemployment soars and spending
declines as consumers hold on to their money which causes severe problems
within the economy. The anticipation of cheaper prices in future means that
people will not buy today thus postponing spending. The spiral effect is unique
in all countries going through a deflationary period in that consumers hold on
to their money in anticipation of lower prices in future. This means that business
is affected as profits decline as they have to reduce production and with
reduction in production comes cuts in jobs which lead to reduced demand for
goods because people cannot afford them and prices will continue to decline.
Falling prices is likely to lead to falling wages.
Zimbabwe’s deflationary problems are multifaceted to include
stifle growth due to perennial decline in consumer spending, a manufacturing
sector hampered by low capacity and the impact of unrestrained imports into the
country. Sales in Zimbabwe have continued to nose dive, real wages have
remained stagnant and some cases declining. The supply of goods and services
has been rising faster than the supply of money and a good example is
technology in Zimbabwe. There has been a sharp decline in the price of tech
gadgets such as mobile phones and laptop computers for example due to an
unprecedented increase in the supply of such.
bernardbwoni.blogspot.com
No comments:
Post a Comment