Muhammad Jawad Butt
Even after 64 years of independence, the fundamental macro-level problems such as poverty, illiteracy, inflation, corruption, etc. still not only exist inPakistan, but are accelerating in magnitude at an ever increasing rate. Not to say that the situation was ideal prior to that, but these problems have been exacerbated to unprecedented levels within the past 4-5 years. We now seem to be running instead of walking towards the edge of a cliff. Though every government has made efforts, even if at varying levels of sincerity, to curb these issues through legislations, fiscal policies, and government programs and reforms but to no avail. The ground realities suggest that all efforts have miserably failed to even stop the problems from increasing let alone solving them. The reasons for this could be many, some political and some technical, but as far as we, the people, are concerned, they amount to nothing except excuses and we are only concerned with results not excuses.
However, in my opinion, one of the main reasons we have failed so far is that we have either almost always taken the naive and simplistic approach of considering each of these complex problems as an independent and isolated issue or have not focused on the right set of issues. In this article, I will argue that a vast majority of socio-economic problems, such as the ones mentioned above, are not independent and isolated, rather, they are merely direct or in-direct effects of some larger underlying root-cause(s); and that any solution that ignores this reality amounts to nothing more than ?beating around the bush?. On the contrary, a solution that addresses the root-causes in a long-term and persistent manner will not only be successful but would also be easier to implement, because it will be focused towards a much smaller set of issues. Furthermore, I will identify what those root cause(s) are in my opinion and describe some essential ingredients of a solution targeted towards those root causes.
For the purpose of our root-cause analysis, lets consider the following set of macro-level issues thatPakistanhas faced throughout a large part of her history:
1. Tax evasion.
2. Military spending.
3. Insecurity and lawlessness.
4. Energy crisis.
5. Lack of employment opportunities.
6. Illiteracy.
7. Poverty.
8. An iron-clad grip on power and resources of the country by the beneficiaries of the status-quo.
9. A persistent trend of accumulation of wealth in a decreasing number of people resulting in an ever increasing gap between the rich and poor.
10. Inflation (or, as commonly understood, an increase in the price of goods and services).
11. Corruption within the electoral process.
12. Corruption within the government.
13. Ability of the government to monetize debt (or, as commonly understood, ability of the government to print money.)
The list definitely goes on but it would be reasonable to say that the above diagnosis paints a fairly complete picture of the disease thatPakistansuffers from. Even though all of the these issues have far reaching negative implications and seem to be of equal importance, however in my opinion, they are merely side effects of corruption and ability of the government to monetize debt. Why do people evade taxes? Mostly because lack of trust on the government. You say no, they do it because they are dishonest. Well, then how are they able to do it without ever getting caught? Because of corruption within the FBR itself. In both cases, the root cause is corruption. What about military spending? Most people, if not all, would argue thatPakistanspends an exorbitant amount of money on defense and the spending is mostly justified through fear mongering and hundreds of other well-crafted lies. So why are we not able to cut the defense spending after all these years? In theory this issue should be easy to address, because, in a so-called democracy, the center of power lies with the elected representatives; and they can easily cut the defense spending to a more reasonable level. However we all know that in reality, this is not the case; the power is and always has been tightly held by the establishment. It is so powerful that it is has literally become a state within a state. We could keep digging further and uncover several reasons for this, such as corruption within the electoral process, inability of the people to elect their ?real? representatives due to poverty, illiteracy, and fear, etc, however the end result of every analysis will always be the same: corruption and ability of the government to monetize debt.
Even though the above argument is solely based on logic and reason, these are not the sole reasons for my belief that these two issues are the root causes of almost all evil. Hundreds of books have been written about this by world class economists, philosophers, leaders, as well as by religious scholars. People have known about the grave negative consequences of this deadly combination as a fact for centuries. However before further discussion, it is necessary to understand how corruption differs from theft and how it relates to debt monetization. It is reasonable to say that corruption is only possible if someone is legally empowered to use other peoples? money without requiring their consent. However in case of theft, the thief does not have legal empowerment. This means that corruption is special type of theft that can be performed only by the government, because only she has legal empowerment over other peoples? money through taxation and/or debt monetization.
Both corruption and theft are because of greed, which is a natural human weakness. So unless there is a medical break through that allows us to remove this weakness from people, we cannot get rid of corruption. It is also an unfortunate reality that we cannot get rid of government altogether because a society needs some form of a government in order to function. As Thomas Paine, an influential author and one of the founding fathers ofUSA, writes in ?Common Sense?:
?Society in every state is a blessing, but government, even in its best state, is but a necessary evil; in its worst state an intolerable one;?
Nevertheless what we can do is to change our monetary system to make it as difficult as possible for any government to do corruption. As noted, a government gets access to money via taxation or debt monetization (or printing money). However the amount of corruption that can be facilitated by debt monetization dwarfs the amount of corruption that can ever be done through tax collection. The difference is so huge that its almost like comparing a ?Fire Cracker? to an ?Atomic Bomb?. Taxation imposes some fiscal responsibility onto the government not only because there is a physical limit to the amount of money that can be collected via taxes, but also because raising taxes is a politically unpopular move. Debt monetization however imposes no such restrictions and allows a government to spend as much as she wants simply by printing the currency. In other words, it gives absolute power to a government, and as the saying goes: ?Power corrupts; And absolute power corrupts absolutely?. In addition, debt monetization has little political consequences because its effect, i.e. inflation, is not immediately visible to the public.
Inflation is an increase in money and credit. Its major consequence is rising prices. Inflation occurs when the economy?s aggregate volume of money expenditures grows at a faster rate than its total real output grows. Inflation is thus an increase in the supply of money without a corresponding increase in the supply of goods and services. In simple words, inflation is the loss of purchasing power of a currency and consequently is a type of hidden tax that falls on each citizen in the form of higher prices for what he purchases. It is analogous to a sales tax on all goods and services. Inflation levies a tax on all who have money or have money owed to them.
Inflation falsifies economic calculations and accounting profits and leads businessmen to make errors. Inflation misdirects production so that scarce resources are dedicated to inappropriate projects. Illusory profits deceive producers, invite mal-production and mal-investments and make planning a nightmare. The initial aura of prosperity dissipates as prices go up, wages lag, and business decisions brought about by false market signals produce bad results. Inflation distorts prices, misallocates capital and resources, changes production patterns, transfers wealth from savers to spenders, discourages saving and investment, and stifles individual initiative. In short, it triggers a ?chain reaction? of socio-economic issues that are extremely difficult to address directly.
Therefore, in my opinion, ?inflation? is a problem that is more devastating than any other problem our country faces and the ?tool? used for this purpose, i.e. ?debt monetization? is a ?root-cause? of all of the problems listed in this article. And in order to close all possible doors to inflation, we have to do two things. First, we have to prohibit debt monetization through a constitutional amendment, leaving taxation as the only source of money for the government. Secondly, we need to make our currency redeemable in terms of a ?fixed amount? of something that has intrinsic value, such as gold or silver.
I understand that this is easier said than done. There are numerous political challenges involved both at the national as well as international level, such as restrictions by IMF. However it should be noted that I mentioned the challenges as being purely ?political? in nature and not technical. It goes against common sense to hear some ?experts? claiming this as being ?impractical?, in fact such a monetary system is the ONLY practical monetary system. It has been used throughout the history of mankind and it wasn?t until the late 17th century (more specifically, with the creation of the Bank of England in 1694) that the fait currency system was forced on the people by their governments. This system has been immensely successful in achieving its sole objective, which, in my opinion, was to allow a few select people to keep a tight grip on power and enjoy a lavish and care-free lifestyle without ever having to do anything useful or productive.
I have done an extensive and impartial (though informal) research on this topic during the past four years. I have spent time thinking about it day and night, debated with hundreds of people from varying backgrounds, read several books, read and viewed hundreds of lectures by well-known and respected people in field of monetary economics, finance, and politics such as Lugwig von Mises, John Kenneth Galbraith, Hayek, Peter Schiff, Jim Rogers, Marc Faber, Ron Paul, etc. I have even read the translation of several Chapters, as well as several related verses within the Holy Quran in order to validate my research and conclusions. And I have always reached the same conclusion; that the only way to curtail corruption in a long-lasting and effective manner is to limit the ability of the government to spend beyond it means, and the only fool proof way to do it is to prohibit debt monetization. I do not want or expect the readers to take my word for it. The main purpose of this article was to highlight an important point of view that has received very little media attention and consequently is not a well understood topic among the masses. I encourage the readers to do their own study on the subject of monetary economics and inflation. As a word of advice for your research, I will end my article with the following quote:
?The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.?
John Kenneth Galbraith.
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