/ 18 November 2011

Swaziland told not to borrow from central bank

Swaziland's economic woes are intensifying as it struggles to meet its civil servant payroll, forcing it to borrow money from its central bank.

You know as a country that you are bankrupt when you default on meeting your civil service payroll. Civil servants are still being paid in Greece, but a leaked memo last week suggested Swaziland would not meet its payroll for November.

By this week it was reported that it had arranged loans from its banks to be able to pay its government workers, but the omens are not good.

Swaziland has been running into trouble for some months now and for a time tided itself over by borrowing from its central bank. When International Monetary Fund staffers found out, there was consternation and significant pressure to stop the practice. Governments should not borrow from their central banks.

This was a pity from the point of view of billionaire King Mswati III as his government could issue bonds that the central bank could use its printing press to buy.

This is, of course, daft economics, as it can produce runaway inflation and general impoverishment.

But as the eurozone crisis has worsened, calls have increased for the European Central Bank (ECB) to use its unlimited capacity to create money to do the same. Such has been the cacophony of calls for the ECB to print, baby, print, that you could conclude the only naysayers have been German-speaking.

One of these German voices is Jens Weidmann, that of head of the Bundesbank, who warned at the weekend that sovereign bond purchases by the ECB were against its rules. He ruled out a lender-of-last-resort role for the ECB.

This seems an obvious enough point. Why should politicians be able to promise the electorate the world and then send the bill to the central bank for it to start the printing press?

This is bunga-bunga economics. Party now; send the tab to the future.

Capitalism is getting a bad rap in all of this, and well it might, particularly because tax rates have been insufficiently progressive to spread the joy around.

But capitalism has many strengths, not least its flexibility, although thiswas apparently lost in the United States in the run-up to the 2008 Lehman collapse after Wall Street’s brains trust created collaterised debt obligations by pooling mortgages.

I remember reading of people who wanted, after the collapse, to do deals to settle the mortgage on their home but couldn’t find out who held the mortgage. Capitalism lost its ability to fix itself. The eurozone has created a real monster where the system does not allow for self-correction. With self-standing countries this happens on an ongoing basis through a fluctuating currency, monetary and fiscal policy adjustments.

The system needs to self-correct, as no one can really tell what is appropriate risk. It clears out excessive risk-takers as the business cycle expands and contracts.

This is sometimes likened to musical chairs. The trick is to ensure you have a seat when the music stops.

The eurozone has given us something new. The music’s about to stop, but the players are joined at the hip.