Guest Contributor | Jul 29, 2020 | 0
It’s a big word but it’s painful to swallow
Stagflation is often viewed as a concept that only exists in newspaper headlines. It is difficult to find a definition for stagflation in a mainstream academic textbook. Nevertheless, it exists and any web search provides hundreds of thousands of references. So there is no shortage of a popular, layman’s definition of stagflaton.
The most fitting case study is the Namibian economy in its current throes.
Namibia is snared in a counter-productive spiral where the cost of living continues to rise while incomes and revenues stagnate or shrink. That applies to both companies and individuals. It also applies painfully to the government. This condition is also the most popular, widely accepted view of what exactly stagflation is – stagnant or receding income in the face of rising expenditure.
But it is fairly useless to identify stagflation and then not entertain where it came from, and what can be done to escape it.
A sensible answer can be found if one considers the origin and impact of inflation first. Inflation in itself is a sticky issue, both for the ordinary man in the street who sees his purchasing power diminishing and for the central bank economist who has to advise on counter inflationary measures.
The problem is, in formal economics or political science, there is not one single answer to what causes inflation.
To describe the phenomenoun is easy. It is the erosion of the value of money. Granted this is somewhat vague but it suffices as a working hypothesis in any attempt to delve to the fundamentals of inflation. In developing economies, where the number of financial relationships and transactions runs into the millions of millions, inflation may be a tenuous construct. In our size pond however, it is fairly easy to define inflation and to determine its causes.
Tacking onto the earlier, broad definition, one can take it a step further and say inflation arises where credit is extended beyond the existing productive capacity of the economy. In very simple terms, it means excessive mortgage credit lead to the housing bubble, which in turn, locked new home owners in so that they can do basically nothing to relieve them of their over-indebtedness. So, the exorbitant housing prices forced new home-owners to take up loans which they would not be able to afford under conventional considerations. This puts pressure on their disposable income. The result is they demand an annual increment from their employer to make up the shortfall.
Now we are into the secondary round of ripple effects created first by the housing bubble and the commensurate extions of credit by the commercial banks. Let’s take a municipality as an example. All its employees demand a payrise. Suddenly the local authority is under wate by 8% to 10%. As all local authorities do when under financial duress, they simply increase utilities and rates & taxes. Now we are in the third round of inflationary after-effects. Now it is no longer only the municipal employees who are affected by the rising cost of living, all the residents of a specific jurisdiction are affected, and everybody’s disposable incomes are eroded. Suddenly there is more pressure for payrises, and this time, each and every commercial entity becomes a victim.
Meanwhile, the municipality did not manage to increase sales or production, it only increased prices, so the pressure mounts. Then the central bank’s feathers are ruffled and it looks at the household debt figures and decides something must be done. What do they do? They raise the repo rate. Now we enter the fourth level of the multiplier effect that started with something as simple as paying too much for a property.
This raises the profitability of commercial banks very nicely, but it does nothing to alleviate the underlying inflationary pressures. In fact, it reduces disposable income even further in the hope that companies and households will spend less and start saving. But in an economy where the typical household spends nearly 90% of its disposable income on debt, what is there left to save. Now everybody has to borrow more money or extend their facilities. Again the banks smile, but inflation is not addressed, not nearly.
In our country, an additional aspect is that of government financing. With its authority and clout to tap the market, it borrows extensively, ostensibley to finance projects but in our case, more than 80% of the borrowings go to maintain the government’s current expenditure, which is almost all salaries.
Then at some point, something gets stuck in the fan, the gravy dries up, and the painful adjustment process starts. That is when incomes for individuals and revenue for companies take a dive, or grow slower.
No we have completed the full circle, the immediate resources are all depleted, inflation continues but revenue not. That is stagflation and that is where we are.