02/06/2021 14:25 Readings 674 Section: File and Analysis
The global crisis is pushing countries to print currency ... and a valid appearance reveals their opportunities in Iraq
Baghdad / The obelisk: In light of the current crisis in the world, paper currency printing has reached record levels, which will lead, in one way or another, to high rates of inflation and increase in prices, and thus the transfer of wealth between groups of society.
The French newspaper Les Echos said in an article by the financial writer Philippe Oran, director of the economic studies department at the French Postal Bank, that the process of creating money does not affect the size of wealth but rather redistributes it.
The writer proposes changing the famous saying of the American economist Milton Friedman everywhere and at all time that inflation is a monetary phenomenon to "the creation of money is everywhere and every time the transfer of wealth."
It does not increase wealth
The author affirms that dealing with this issue requires returning to the root of the issue, which is the nature of money as a unit of account. In the past, exchanges in the barter economy required parity and proportionality between two producers, and money came to facilitate commercial operations by setting a price for each product with a reference quantity.
But setting the standard does not produce wealth. Switching from using the French franc to the euro, for example, did not create wealth overnight, nor did it destroy it.
The writer continued: Creating more money and distributing it evenly to members of society is theoretically a fair and neutral process, but creating money does not mean increasing wealth.
The author likens that to adding water to mint, so the actual amount of mint remains the same, and what can be controlled is the level of dilution, and it can be said here that the amount of money is water, and the rate of inflation is the degree of dilution, and therefore the creation of money does not at all mean the creation of wealth, because what is We added it is water, not mint, and in the long run, wealth can only come from the return of the sums invested, and the way in which that money is used, not from its quantity.
If inflation doesn't have an effect on real wealth, why worry? The author explains that in addition to the possibility of a record high inflation rate according to certain mechanisms, the direct result is an increase in prices, which affects the members of society disproportionately.
The writer added that the world is not perfect, and the distribution of wealth is not at all fair, for example, the sovereign debt monetization policy adopted by the European Central Bank provides cash liquidity to the countries of the region, and the governments, according to the recovery plans, support the most affected groups and companies threatened with bankruptcy.
The financial advisor to the Prime Minister, Mazhar Muhammad Salih, responded to the black-eyed expectations regarding the disastrous results of the option to print the Iraqi currency - according to analysts and economists' description - by saying that such a scenario presents a very pessimistic and warning economic prospect, and reminds the people of a dangerous stage of the economy Al-Iraqi during the international siege on Iraq during the dark period 1990-2003.
Salih told Al-Masalla that public finances relied at the time on the cheap monetary policy and inflation financing at a rate of 95% of its revenues to finance expenditures at that time,
that is, by using the mechanism of the monetary authority's submission to the financial authority and its dominance in accepting government treasury transfers that the public finances consistently issue by the central bank,
As he considers this government debt instrument as a financial asset matched by liabilities or liabilities, which is the currency issued to finance the absolute budget deficit (and convince the public that it is external money or (temporary) cash wealth, but it is highly eroded in its purchasing power due to the inflation expectations it generates that the citizen seeks every hour.)..
He added: That financial policy dominating the monetary issuance in the levers of its financing at that time led to the creation of a huge monetary mass that generated surplus demand or spending within the overall economy that was not matched by sufficient commodity supply, which reflects the case over the course of twelve years to the creation of continuous inflationary expectations Caused by the continued strength of demand, it is said.
And he went on: That financial policy, which was founded on the principle of government financing with an inflationary tool based on the super cash issuance, led to sharp and continuous rises in the general level of prices, and the inflation in it increased to become unruly and three decimal places, and the commodity that was equal to 20 dinars in 1990 became equal to 2000 dinars or more. During the 1990s, cash incomes declined and the standard of living declined.
Dr. Mazhar Muhammad Saleh believes that the aforementioned warning is only a very dark scenario to remind the people of a dark period of time that the people lived and their livelihoods were uprooted in the era of the siege of the 1990s and the few years that followed.
Dr. Saleh expects that the state of Iraq will not reach that, but in spite of that remains the policy of relying on monetary policy to finance the deficit by issuing cash (or monetizing debt) easy government financial leverage and is known (in the event of its continuation) in the knowledge of public finance as one of the constraints of the fragile budget (The dangerous) because it neglects the inflation indicators and its potential projections as a result of financing the budget deficit by issuing cash without realizing the risks of its repercussions on the level of individuals’ cash income and its deterioration.
The economic advisor to the Prime Minister spoke to the obelisk earlier, about what the Iraqi public finances faced in the years 2020-2021, as the draft federal budget for 2021 indicates that the total deficit planned in it will rise to nearly 71 trillion dinars, and the aforementioned deficit will be no less than About 42% of total spending there, and a percentage of not less than 28% of the current GDP.
Salih told Al-Masalla that the contractionary financial conditions in Iraq have led to dangerous economic manifestations, as the contraction of government demand or spending in the year 2020 has led to a widening of the national income gap, and a drop in growth by 11% of its rates.
He added that the contraction was accompanied by an increase in unemployment levels that were not less than 25% of the Iraqi workforce, as well as an increase in poverty rates among the population, which exceeded 30% of the country's families.