Commentaries | Jan 03,2021
Feb 19 , 2022
By Christian Tesfaye ( Christian Tesfaye (firstname.lastname@example.org) is a researcher and Fortune's Deputy Editor-in-Chief whose interests run amok in the directions of political thought, markets, society and pop culture. )
Inflation is no longer a phenomenon affecting a few countries with the structure of their economies and monetary policies out of whack, such as Ethiopia and Turkey. It has gone global. Part of the reason is supply chain disruptions. But the main reason, as almost always, is fiscal and monetary expansionism across the world in response to the economic crisis wrought by pandemic-induced lockdowns.
Public spending is believed to have exploded by 10 trillion dollars in response to the pandemic while interest rates were lowered to historic lows, especially in the developed world. The wisdom of this will be debated based on how long global inflation lasts. Still, it is also refreshing to see that fundamental macroeconomic theories remain as crucial as ever.
No one looks at the cost of goods and services going up and thinks this could sometimes be good except economists. “Inflation is forgetting,” wrote Noah Smith, an economist, on his Substack, a blog post platform.
What does that mean?
Take the highly politicised and controversial issue of student debt in the US, which have a fixed interest rate. The higher the inflation, the lower the real value of a student’s debt compared to when they started in school. The erosion of the dollar depreciates the value of the debt.
Of course, this is a simplistic example. Several other factors will determine whether the debt burden indeed becomes more bearable. If the economy stagnates and real wages do not increase, or at least hold up to inflation, student debt will continue to harm financial standing.
But this “forgetting,” in reference to debt, informs how inflation will redistribute wealth from one section of the population to another. This is very much the case in Ethiopia. Debt has been under the continued attack of inflation’s “forgetting” influence over the past three years since the cost of goods and services has been going up by double-digit percentage points. This is good for some, terrible for others.
The beneficiaries are debtors. If there was ever a good time to take out a loan in Ethiopia, this is it. Even with a mind-numbingly high-interest rate of 20pc, it is a good bet that the debt will still be much less by the time the principal comes due. Unfortunately, not everybody can stroll into a bank and take out a loan. Businesses and individuals need to have collateral, the right networks in the financial sector or both to take out a loan.
Highly liquid businesses and individuals will also benefit to a high degree. One million Birr in a bank account? Buy a car; it will most certainly appreciate and will be more valuable than one million Birr in the future. How about 10 million Br? Invest in some real estate. The same rule applies.
In the short term at least, employers will be well off as well. Businesses usually do not waste time hiking prices for their products and services, but they drag their feet on pay increases for their employees. Before the labour market equilibrium adjusts as workers demand higher wages en masse, businesses will make a windfall between the higher prices they charge and the lower labour cost they have before the real value of wages catches up.
Wealth will be redistributed to this higher income group, but from whom?
It will be lower-income groups. For one thing, inflation is an unofficial tax on every consumer, but the burden will be more punishing for the poor. They will also not have enough savings to buy assets such as cars or real estate that appreciate or at least hold the value of their wealth.
But those mean that their real wealth is depreciated into the ether, not that it has been re-distributed away from them. The latter happens when they engage with financial intermediaries. The savings in their accounts are basically loans made out to a bank, which becomes a holder of short-term debt, which is in turn loaned out to the private and public sector. As the ultimate creditors to commercial banks, savers lose out the most.
On a more interesting note, it also means that it makes sense for the federal government to continue to seek credit through treasury bonds. It benefits from taking out loans that, when finally paid back, their real value has significantly fallen. If government spending prioritises pro-poor policies, such as welfare, health and education, it would be a further redistribution of wealth, this time towards the part of the population that is less well off. Unfortunately, banks that hold these bonds, the government’s creditors, will be put in an increasingly precarious position. For better worse, these are interesting times.
PUBLISHED ON Feb 19,2022 [ VOL 22 , NO 1138]
Commentaries | Jan 03,2021
Commentaries | Apr 26,2019
Agenda | Sep 11,2020
Commentaries | Nov 05,2022
Commentaries | Sep 21,2019
Commentaries | Jul 24,2021
Viewpoints | Jun 05,2021
Fortune News | Oct 23,2021
Sunday with Eden | Jul 27,2019
Viewpoints | Oct 08,2022
Photo Gallery | 67213 Views | May 06,2019
Photo Gallery | 58993 Views | Apr 26,2019
Fortune News | 51828 Views | Jul 18,2020
Fortune News | 51484 Views | Sep 01,2021
Commentaries | Mar 18,2023
Life Matters | Mar 18,2023
My Opinion | Mar 18,2023
Sunday with Eden | Mar 18,2023
Agenda | Mar 18,2023
Editorial | Mar 18,2023
Dec 24 , 2022
Biniam Mikru heads the department of cabinet affairs under Mayor Adanech Abiebie. But...
Jul 2 , 2022 . By RUTH TAYE
On a rainy afternoon last week, a coffee processing facility in the capital's Akaki-Qality District was abuzz with activ...
Nov 27 , 2021
Against my will, I have witnessed the most terrible defeat of reason and the most sa...
Nov 13 , 2021
Plans and reality do not always gel. They rarely do in a fast-moving world. Every act...
Leaders of the National Election Board are in a charm offensive mood, of a sort. Last week, they organised a rare tour for members of the me...
When the country's most senior diplomats and envoys return back to their posts after two-week debriefings, they leave behind a point or two...
Mar 18 , 2023
Ethiopia's economy once hailed as a paragon of growth and development, now faces a co...
Mar 11 , 2023
Ethiopia is rapidly emerging as one of China's top African debtors, second only to An...
Mar 4 , 2023
Once again, Ethiopia has claimed international attention in the past few weeks for re...
Feb 25 , 2023
Millions of people in Ethiopia have continued to be deprived of access to information...
I met Solomon Desta a couple of years ago. He lives and works in a religious institu...
A comedian made a joke about how citizens' wishes are not granted but rather what government thinks is ou...
Mar 18 , 2023
Residents in the capital are all too familiar with the rationing of running water supply as the 0.48 million cubic meters of water pumped ou...
Mar 18 , 2023 . By MUNIR SHEMSU
Consumers in the Benishangul-Gumuz Regional State feel the pinch of a high cost of living, exacerbated by...
A Korean-based consultancy firm, DONG IL Engineering Consultants bagged the contract to conduct a detaile...
Mar 18 , 2023 . By AKSAH ITALO
Authorities raise the minimum price threshold for horticultural products on vegetables and fruits exporte...
Or see contact page