Keep the dragon of inflation on its chain

One of my most vivid memories is the time, years ago, during the period of hyperinflation in Brazil, when my late wife (who was Brazilian) and I were on holiday in that country, and it came time to pay our hotel bill.

In those days, there were no electronic credit card machines – just the mechanical slide devices, which meant that it took a day or two (or even three, depending on where you were) before the bank or credit card company was informed of, and could record, your transaction. But, with hyperinflation, the value of the currency would depreciate significantly over those couple of days – nay, over a matter of hours – which meant that the bank or credit card company would lose money on each and every transaction. So, buying anything on credit was impossible. Buying anything with a cheque (remember cheques? They were still widely used then) was also impossible for the same basic reason. Everything had to be paid for in cash – unless you were rich, of course, and could have funds transferred directly from one bank account to another very rapidly (not instantaneously in those days but still in a matter of only minutes).

So, there we were, with the hotel bed covered in bank notes as we counted out all that we needed to pay the bill. I kid you not – most of the bed was covered in paper money to make it easier for us to count it and group various denominations of the currency together (I cannot remember if the Brazilian currency was then the cruzado novo or the cruzeiro; both were devalued by hyperinflation). It took a bit of time, with double-checking. You did not want to get the number and value wrong! Then I gathered all the required notes together in a roll. That roll was as thick as my wrist – again, I am not exaggerating. And then I carried that thick roll down to reception and paid our bill. I felt like a character in an American gangster movie.

Hyperinflation is not a pain – it is devastating. I would go so far as to say that it is evil. And it is especially devastating for the poor. The poor, by definition, do not have access to credit. They do not have inflation-linked interest rate bank accounts. They live in a cash only world. Any savings they can scrape together are likely, for practical reasons, to be in cash hidden somewhere in their dwellings (perhaps buried in a box). Bank branches are likely to be too far away and not easy to get to. Simply travelling to and from a bank would consume scarce money (in taxi fares). Their lives centre on carefully counting every cent, let alone every rand. Can they afford to buy that tin of cheap sardines today, as well as a loaf of bread? Or just the bread? But hyperinflation completely wipes out the value of those cents and rands and drives the costs of basic foodstuffs through the roof. The rich would not notice; we in the middle class would complain, but be able to endure it. For the poor, it would result in reduced food intake, risking malnutrition. For the very poor, it could push them to the verge of starvation.

And note, of course, that I am only pointing to the effects on food prices. Poor people also need to buy clothes, pay for transport and buy some kind of fuel for cooking, light and heat during the often bitter winter nights. The costs of all these would also soar with hyperinflation.

It was because of the bitter experience of hyperinflation that then left-wing candidate Luiz Inácio Lula da Silva (Lula) had to promise to be fiscally responsible and keep inflation under control in order to win election as President of Brazil in late 2002 (his first term started on January 1, 2003). This was his third run at the Presidency – in his first two, he had made no such promises and lost. For all their faults – now known to be many – he and his hand-picked successor, Dilma Rousseff, never allowed hyperinflation to raise its monstrous head again.

Lula succeeded President Fernando Henrique Cardoso, the man who slew the dragon of hyperinflation. Cardoso did so while Finance Minister in 1993 and 1994 under President Itamar Franco. Elected President by a landslide – against Lula – in 1994, he won re-election, also against Lula, by almost as big a landslide in 1998. Cardoso held office from 1995 to 2002. Brazilian Presidents are limited to two consecutive terms in office. Likewise, in Peru, which also suffered from hyperinflation, it has been the case for nearly 30 years now that only candidates who credibly promise to be fiscally responsible are elected to the Presidency.

So, here is the key point: inflation targeting by the South African Reserve Bank (SARB) protects the poor. This is such a fundamental point I will reiterate it: SARB inflation targeting protects the poor.

I have been discussing the fire-breathing dragon that is hyperinflation, but the fact is that any increase in inflation is a problem for the poor, especially the very poor. Requiring the SARB to abandon inflation targeting would be an actively antipoor measure.

One other point: hyperinflation is also devastating for economic growth. Oh, you can have lots of nominal growth – growth rates on paper – but when you strip out the hyperinflation, you do not find much left. How can you sell many cars or fridges or washing machines if credit does not work? And such growth that there is tends to be very imbalanced. The idea that you can stimulate economic growth by adopting a looser inflation policy is downright wrong. It is stupid. It does not work. It has been tried repeatedly and it always fails. Oh, it starts off by seeming to work: growth does accelerate, for a year or two. And then the inflationary dragon breaks free, takes off and begins to lay waste to both society and the economy with its scorching flames. And, once free, it is difficult to chain up again. South Africa must avoid this nightmare. The SARB must be allowed to keep the dragon locked in its dungeon.