The Birthday Gift, The Invisible Hand, And Molding Nature

“The prudent law of investment is you’re never supposed to make a complete decision, no or yes. It’s always a marginal one...” — James Grant

It has been over a month since our last hit. What happened to us you may be wondering.. We don't know where to start, dear reader. A lot has happened in the past month, it made us believe 24 hours isn't in enough in a day. First we received a package in the mail welcoming us to the university, we were stunned, then few days before our birthday our girlfriend whom we have spent half a decade with, gave us a gift. It wasn't in a gift wrapped paper as you may have expected, she told us, "we are done, i don't love you no more". We felt the electric shocks, then we checked the social networks, and saw her with what we suspect to be her new lover. As you can imagine dear reader, we still haven't relocated our heart, finally we figured we have emotions as well. Then after came a call that shocked us again. See dear reader for the past five years we have been working on project x, we gave up our life for it, we delayed pleasure, university, family, you name it, we lost weight, but finally we came to a conclusion. We have worked the in and the outs, then last week we received a call, suggesting us to change our theory into practice, and assured us no matter how complicated our formulas are, it will be quantified and coded as a software. At this time we were confused, we were sad, and so happy at the same time. Finally what was once a dream, is becoming our reality. As you can imagine we are heading to the university, come the new year. The software engineers from Dallas, Texas, tell us they are developing neural network for other clients, which is some sort of artificial intelligence that predicts the financial markets.We aren't declaring victory yet, but its a major milestone in our life. We don't know where this is taking us dear reader, but we know now not even the sky is the limit. So far we also learned our readers belong as far as in Australia, India, Brazil, basically each continent with the exception of the Arctic and Antarctica, we doubt they have a set of TV there. As always we are hoping this can pass as some sort of excuse, forgive us dear reader but we don't know what to feel. Happy or sad? Or a combination of both? So far we are down one point, and up three. Our birthday present wasn't what we expected it to be, but then nothing in life comes as you expect it to be. Maybe you the dear reader can help us, gives us some type of advice to understand our state of emotions. But our beat is politics or money, why bother with what happens in our backyard. We were asked our opinion on the following matter, few weeks ago.. and that's what we wanted to share today.

·         How efficient and effective is this system
·         To what extent is the system setup as a competition between the rich and poor
·         Should the winners be helping out the losers

Our earth compare to other planets seem to be a better place for humans and other creatures of nature. Despite being better, planet earth goes through turbulence's  such as hurricanes, earth quakes, tsunamis, climate change etc. It’s a self-correcting system; it creates, and destroys some. And yet, we claim earth to be our safe home. It took earth billions of years to figure out the troubles before becoming a much rather place to sustain life. Man might have 200k years’ worth of experience here on earth. Even so time to time earth destructs, and recreates, and there seems to be no regulator, that’s trying to stop nature’s course. How efficient is earth one may wonder?

We humans are as well nature’s gift, what separates us from other creatures, is the fact that we can say, “I think, therefore I am”.  If you think then you have a taught, and since every taught of every human being is different, is it safe to say that a single form of entity can control the needs and the wants of everyone?
Man for the most part of his history, didn't necessarily need an economic system. He hunted and gathered for his survival, used stone as a tool, then copper, and later iron. Each time he advanced technologically, he increased his odds of surviving, which also gave him the incentive to multiply his seeds. It wasn't until the industrial revolution man figured the use of energy, in which the history of the world changed radically. Living standards increased income of the masses shot up, and population growth exploded. At this point man understood his food can be grown by a farmer, his protein needs by the local butcher, and other goods and services by complete strangers trying to satisfy their greed.

Society became a more complex playground, and man began to ask, how do we provide the needs and the wants? How do we produce, to whom, what, and where? To answer these questions, two moral philosophers offered their opinion. Adam Smith and Karl Marx, both men wrote a book, the former suggesting, “The invisible hand”, while the latter argued, “by molding nature in desired ways”.

What is the invisible hand? According to Adam Smith, it is the unintended action of the self that brings the benefit to the mass.  In The Theory of Moral Sentiments (1759) in Part IV, Chapter 1, where he describes a selfish landlord as being led by an invisible hand to distribute his harvest to those who work for him: "The proud and unfeeling landlord views his extensive fields, and without a thought for the wants of his brethren, in imagination consumes himself the whole harvest. Yet the capacity of his stomach bears no proportion to the immensity of his desires  the rest he will be obliged to distribute among those, who prepare, in the nicest manner, that little which he himself makes use of, among those who fit up the palace in which this little is to be consumed, among those who provide and keep in order all the different baubles and trinkets which are employed in the economy of greatness; all of whom thus derive from his luxury and caprice, that share of the necessaries of life, which they would in vain have expected from his humanity or his justice. The rich are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society.” On the other hand Karl Marx wondered, if a single entity can control and mold nature so that we can achieve paradise on earth. In this case a government would act as a single entity, to decide what each member of society wants and needs are? Even if it is a rhetorical question, one can ask, how can a single entity read every single persons mind?

The Soviet Union is well known for embracing Marx’s ideas. The state acting as a single entity became the brain of society, by trying to mold nature, and suppressing the will of each individual thinking capability. In the Theory of Human Nature Marx assumes “that humans are capable of making or shaping their own nature to some extent”.  Therefore the state took over the means of production and began centralized planning to achieve the greater good. Comparatively the United States adopted the principles of Smiths invisible hand. In which self-thoughts generated from one being to satisfy his greed, leads to unintended benefits for society in general. So far ever since the industrial revolution, the world has tested both men’s theory in practice. A common principle in both theories is that not one is a perfect system to answer our wants and needs. While Smiths idea suggest capitalism to be a creative destruction process just like mother nature, Marx’s theory claim to bring equality by force against the will of nature. What we have today is a proof of Smiths free market principle to be much better off, than Marx’s control experiment. Earth for example destroys, and then creates, we are all grateful for the creative side of nature, but not the destruction. Same goes for the free market economy, whenever inefficiency or there is a waste in the system, it destroys the bad apples, in order to create fresh ones. Which means the invisible hand adjusts accordingly to the needs and wants of newly adjusted thoughts of society. History tells us any attempt to control this process will end badly, and it’s the reason the Soviet Union collapsed. Therefore it won’t be a sin to conclude capitalism to be more efficient and effective than any other economic system ever tried.

Since the Great depression, which was the destruction period for capitalism, the role of government in the economy has been increasing. English economist John Maynard Keynes sought to explain why depressions occurred and what could be done to prevent them.  Simply put, he thought government should use its massive financial power (taxing and spending) as a sort to stabilize the economy. Depressions, then, should be attacked with increased government spending at the bottom of the income pyramid.  Keynesian economists call this "counter-cyclical demand management," believing that the government's massive financial impact can be used as a counterweight to current market forces. In the Book of Genesis, Pharaoh had a dream. In it, he was standing by the river. Out came 7 fat cattle. Then, 7 lean cattle came up out of the river and ate the fat cattle. A similar dream involved ears of corn, with the good ones devoured by the thin ears. Pharaoh was troubled. His dream interpreters were stumped. So, they sent for the Hebrew man who was said to be good at this sort of thing — Joseph. Pharaoh described what had happened in his dreams. Without missing a beat, Joseph told him what they meant. The 7 fat cattle and 7 fat ears of corn represented years of plenty with bountiful harvests. The 7 lean cattle and thin ears of corn represented years of famine. Joseph wasn't asked his opinion, but he gave his advice anyway: Pharaoh should put into place an activist, counter-cyclical economic policy. He should tax 20% of the output during the fat years and then he would be ready with some grain to sell when the famine came. Genesis reports what happened next: the seven years of plenty ended and famine struck, and when Egypt was famished, Joseph opened the storehouses, and sold food to the Egyptians. People from all countries came to Egypt to buy grain, because the famine struck all the earth. There is no need to argue with the Biblical account. Besides, it sounds all too likely.

Franklin Roosevelt took Keynes advice and called it the new deal, initiating many programs to fight the depression. Unlike the pharaoh that saved in the good times, modern governments do not run surpluses. To comprehend what it means, when we say government role has increased, we have to understand, how economic activity is measured. Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period. GDP is calculated in the following format. GDP= Private consumption + Investments+ Government spending+ (exports-imports). As for example In the wake of the financial crisis of 2008, The GDP of United States fell dramatically, to counter this decline in private consumption, investments, export, and, import, the share of government spending rose substantially. Soon after the administration of Barack Obama claimed economic growth, but it was a fallacy. The United States government was spending more money in unproductive places like sending unemployment checks, feeding 47 million hungry souls that can’t feed themselves and a trillion dollar or so is allocated for empire building thru the military industrial complex. And also the government was bailing out companies the free market found to be weak and unnecessary. While everything was crumbling in the GDP formula, government spending went up, and according to the government that's growth. From the close of WWII until 2007 each downturn in the economy was met with more and easier credit, leading people and the government to borrow more and more money. 

The ‘neo-Keynesian’ economists argue government may be deeply in debt already, but it can go further into debt during the lean years, in order to offset the contraction in the private sector. An investment brings a revenue stream a result that justifies and pays for the investment. With a little luck, the investor recovers enough money to pay back the loan with interest and ends up with a little bit extra. That little bit extra is real ‘growth’ new wealth that didn't exist before. But there is no revenue stream coming from Social Security payments, fighter jets, the latest fashions, or other consumer items. The money is spent consumed keep up this borrowing and spending at some point it will be unable to continue. The suffering that comes to a market is known as a ‘correction.’ Sharp, dramatic corrections are called ‘crashes.’ In an economy, it is called a ‘‘recession.’ Severe cases are called ‘depressions.

The bigger the roles of government gets the wider the gap between the haves and have not’s get. In order for the government to do what it feels good or counter economic down turns, resources have to be extracted from the productive part of society. This usually happens in the form of taxing or borrowing, which means those funds that could be available for the private sector to generate wealth are confiscated and redistributed to the public by the government. What in reality is happening is a single entity trying to dictate the outcome of society. While the have not’s receive food stamps, and other similar transfers, the top class gets a subsidy or a bailout. This action by the government creates, “entitlement mentality”, in which societies morals for self-responsibility deteriorates.

As the above charts indicates citizen’s personal savings have been going down for the past 30 years, a contrarian indicator of entitlement mentality. So far the rich seems to be the beneficiary of the government’s untended action.  Widening the gap between the have and the have not’s.  To understand up to what extent the system is set up as a competition between the two classes, it’s important what the role of government should be in a society.

Imagine a world without traffic lights, would you feel safe or secure to drive in that environment? Or imagine a world where there is traffic lights, but you get rewarded for skipping red lights. Our modern government is setup where bad behavior is either encouraged or rewarded. If a corporation or a business makes bad decision, it shouldn't be rewarded by a subsidy or a bailout, if it is meant to die, let it be. The government’s role in society should be just like traffic lights, where everyone follows the rules, but if one violates the law, it should accept the consequences. If the owners of BMW’s, Mercedes Benz, Ferraris, and the like are being rewarded for skipping red lights, it automatically makes it unfair competition for the Honda owners. To date the United States government has borrowed $16 trillion, of which $5 trillion was borrowed in the past four years alone. Net result so far has been the growing gap between the rich and the poor. Instead what happened is the price of gold relative to the dollar went up in prices, as the state expanded its balance sheet to solve society’s ill.

 “Great empires, such as the Roman and British, were extractive,” economist Paul Craig Roberts observes. “The empires succeeded, because the value of the resources and wealth extracted from conquered lands exceeded the value of conquest and governance.”  But unlike empires of the past, the American Empire has a perverse logic all its own. The results from this turn of phrase are less than desirable. Again Roberts: “Washington’s empire extracts resources from the American people for the benefit of the few powerful interest groups that rule America. The military-security complex, Wall Street, agribusiness and the Israel lobby use the government to extract resources from Americans to serve their profits and power. The US Constitution has been extracted in the interests of the Security State, and Americans’ incomes have been redirected to the pockets of the 1%. “That is how the American Empire functions,” concludes Roberts. Instead of plundering foreign resources to finance it, the American Empire is always looking to inflate the next financial bubble. Each of these serial bubbles has the effect of “extracting” wealth from the citizens by drawing both savings and credit into overly inflated asset classes that then implode. As the bubbles inflate, robust tax revenues flow to the federal government. As the bubbles implode, tax-payer dollars flow to the connected Wall Street elite. Thus, over time, savings pass from the wallets of citizens to the pockets of scoundrels in Washington and on Wall Street. Thus as in the past, when the Roman Empire began its decline, the first symptom was its currency.  Each consecutive emperor devalued the content of the currency, until it became worthless. If history can be a guide, it now becomes the question of when will the American empire collapse and leave no resources to compete for.

We all agree that the winners in society should help the losers. Most often what we don’t agree is on how the winners should help. If history can be a lesson worthy of learning, then we should all agree to leave the government out of the equation. If we let nature take her course, the best alternative we might have is ourselves. In which we all accept personal responsibility for the good and bad. There will be a period of pain, as well pleasure. After accepting this fact, we then can acknowledge we can help ourselves.

Regards,
Eskinder Haile

At What Rate Is Ethiopia Booming?

• The IMF Vs. Ethiopia
• Alternative Methods Of Measuring Economic Growth

" If all economists were laid end to end, they would not reach a conclusion." -George Bernard Shaw

Ethiopia is clearly booming, not only the Ethiopian government but the IMF and other institutions seem to agree. What they aren't agreeing on is the math, The Ethiopians claim double digit, while the IMF says growth is in single digits. What surprised us is the fact that both sides agree on inflation numbers, but cant agree on growth numbers. We are certain that both sides use calculators, what seems to confuse us is, how each side is using the calculators.

Governments all over the world never seem to tell the truth, be it economic data or anything else for that matter. Therefore making business decisions based on GDP numbers is a fallacy, even doctors were advertising cigarettes half a century ago.Therefore you have to close the textbooks, and find alternative methods to measure economic growth or at least be able to conclude if an economy is expanding or contracting. Before continuing we find it useful, you the dear reader understand how modern economies are measured.

What Is GDP?
Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period. In the year 2002, Ethiopia produced goods and services worth about $8 billion, today in 2012 it is estimated that number will reach close to $50 billion. GDP is calculated in the following format.
GDP= Private consumption + Investments+ Government spending+ (exports-imports).
There is a flaw in that calculation already, if you happen to wonder whats wrong with it just give us your undivided attention. In the wake of the financial crisis, The GDP of United States fell dramatically, to counter this decline in private consumption, investments, export, and, import, the share of government spending rose substantially. Soon after the administration of Barack Obama claimed economic growth, but it was a fallacy. The United States government was spending more money in unproductive places like sending unemployment checks, feeding 47 million hungry souls that cant feed themselves, and a trillion dollar or so is allocated for empire building thru the military industrial complex. And also the government was bailing out companies the free market found to be weak and unnecessary. While everything was crumbling in the GDP formula, government spending went up, and according to the government that's growth. We say its a form of enriching the wealthy,and encouraging reckless behavior at the expense of the poor.

We happen to be suspicious of governments, it doesn't matter if they are playing with statistics from Washington D.C, Beijing, or Addis Ababa. Politicians sugar coat everything, its just what they do, part of the game to get re-elected or stay in power. If we can't trust or use GDP to guide us or help us to know economies health, then what can we use to figure out if the economy is in the hospital on life support or dancing at the disco? We are glad you are asking dear reader, we ourselves were convinced by the late prime minister Meles Zenawi's growth numbers, and even concluded to relocate to Ethiopia. But then we reminded ourselves the numbers were being massaged from Addis Ababa. So, we were forced to use alternative ways, we thought that would be difficult to manipulate by statisticians.

Energy 

Modern Economies need energy as input for production. If demand for energy is increasing, and more importantly energy consumption is increasing, it won't be a sin to assume economic activity to be expanding. Take a look at the following charts, it shows Ethiopia's energy consumption.

The next chart shows Ethiopia's Petroleum Consumption

Pay attention to the year 2000, it seems like magic happened in Ethiopia. All of a sudden, the nation began consuming energy. Something else happened during the beginning of the new century, take a look at the following charts. It shows energy consumption for the United States.

The Next chart shows petroleum consumption for the United States

Energy consumption decline began at the turn of the century for the United States. We can also say the American empire began its downtrend by welcoming the 21st century. When a recession hit the states after the dot.com bubble in the year 2000, the central bank lowered interest rates. People who lost millions speculating in internet companies, immediately shifted to the real estate sector encouraged by low interest rates, and phony growth took place until the mother of all bubbles busted in 2008. Do we think the American economy will revive, we don't think so. But does it matter what we think, we don't think so.

Banking

If blood isn't flowing properly in ones body, we doubt one can live properly or even exist. Same goes for capitalism, If loans aren't being paid back, its like blood clogging in ones body. In the United states over 500 banks have closed doors since 2008. Don't believe us just check the list for yourself at the following site. http://www.fdic.gov/bank/individual/failed/banklist.html

On the other hand Ethiopian banks even though smaller in numbers haven't lost a dime let alone fail. Year after year since the year 1995, banks have reported record profits each year signaling transaction volume increase. We aren't sure if Ethiopian bankers are smarter than western counterparts, but clearly we can tell the boom cycle to be in favor of Ethiopia and the bust to be for the Anglo-Saxons.

Government Spending

Where is the money? Is it being used to bailout oligarchs? Or feed hungry people? Not that there is anything wrong with that, its just isn't productive. Or is it being spent on the military for wars? To us that sounds like the U.S, but the Ethiopian government when seen from far it seems like its spending its money from whatever source it gets it from on productive base. We aren't denying the existence of 5-10 million poor souls in Ethiopia who are dying of hunger. But in economics you always face choices and have to choose the least ugly one. Its impossible to do many things at once because resources are limited. What we assume is the government of Ethiopia chose the following principle, Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime. Therefore its spending money on building roads, dry ports, dams, railroads, industrial zones, and schools. Just as the United States did in the 20th century when it began industrializing. On a positive note around 35% of Ethiopia imports have been capital goods for the past few years. These are tools and machinery that are used to build modern infrastructure to accommodate a modern economy. Thus we clearly see a trend, that the Ethiopian Economy is saying goodbye to agrarian mentality and welcoming industrialists. Give us a break dear reader, nothing happens overnight.

Cargo Traffic

In the developed world investors that don't trust government data look for market signals. As the world is more interconnected more than before the flow of trade matters. If Chinese import declines, most likely Australians' export declines. If Chinese export declines, most probably United States is importing less. Thus if you are independent thinker you might want to learn about the Baltic Dry Index.

   

The index measures the demand for shipping capacity and demand for shipping varies with the amount of cargo that is being traded in various markets. We aren't trying to scare you but world trade has collapsed, there isn't much to move across the seas, at least that's what "Mr. Market" is telling us. Unfortunately there isn't any index to tell us for cargo traffic in Ethiopia, but we have heard few things lately. First the Ethiopian government is building dry ports inland to ease the congestion in Djibouti, second Ethiopian Airlines is buying cargo Boeing planes, third Ethiopian Shipping lines is expanding its fleet by buying eight vessels from china, and last not but least Ethiopian Airlines is building what it claims to be the worlds largest cargo terminal. Forget about the accuracy of growth numbers, you will never know the exact number. We hope we are saving you a headache dear reader, next time you won't need to argue if Ethiopia is growing at 7% as IMF calculators say or 11.7% as the regimes calculators suggest. Ethiopia is growing, but we don't know at what rate, we aren't as smart as you think. We barely can pass math class, let alone use calculators. Our thinking goes like, if our leaders and masters can't agree on math, but the world listens to them, then what makes our thoughts and ideas invalid?

Regards,
Eskinder Haile  

Nuro Lemin Tewedede? Part 2

• The U.S following Zimbabwe's model
• History of banking in Ethiopia
• The rise of the free market, downside of the Derg regime, and the cause of Inflation In Ethiopia

 The Zimbabwe model

Its has been about ten days since we posted the first part of why we think life is getting expensive in Ethiopia. Its too much going on around us, life in the west as a student can be crazy. Professors barely teach you, but then assign you tons of homework, papers, etc. We aren't complaining but we are hoping this can pass us as a good excuse for taking to long to publish the second part. Mean while there has been a lot going on in the western hemispheres finance world. The Federal Reserve which is the central bank of the United States have decided to keep interest rates between 0 and 0.25%. It wants commercial banks to borrow money from the central bank basically for free, in the hopes that commercial banks can lend to consumers at cheaper rates. Instead the banks get the money and buy government bonds that earns them what is considered risk free 2% return. Americans have borrowed for so long and consumed so much in the past, there credit cards have maxed out. Its time to repay their debts not borrow more, Its time to save not spend, therefore the banks are scared to death to lend more money. Politicians and main stream economist still think they can meddle and fix the issue, we doubt they will achieve anything. Whats even more shocking is that, at the last meeting the federal reserve decided that they will be printing $50 billion per month for unknown period of time. That's insanity, we suspect they must have hired someone for consultation from Zimbabwe's central bank. This new money is most likely going to end up in speculators hand driving up prices to a new level. Therefore if you are sophisticated put your money in the stock market, if you aren't buy as much properties as you can. Lets explain residential properties have become so cheap and affordable, its a no brainier thanks to record low mortgage interest rates. In the states what matters when someone is buying real estate is the mortgage payments not the price tag of the property. Since the reality is record low mortgage rates housing in the states hasn't been this cheap in a long time. We aren't financial advisers but we have noticed a window of opportunity. The financial crisis has destroyed many peoples credit history, turning them to renters instead of owners. Demand for rental units has been going up ever since, alongside with increasing rent price. If you are someone with a credit score of 620 and have 3% down payment saved up, U.S department of housing and Urban development is ready to help you buy your dream property. If mortgage payments are cheaper, but rent is getting expensive we are certain you can make a buck. If mortgage rates keep going down you can refinance, or if the federal Reserves dream comes true and inflation goes out of hand, and they finally decide to raise interest rates , you will be safe because you have locked your mortgage at record lows for 30 years.

History Of Banking In Ethiopia

Modern banking in Ethiopia was introduced in 1905 when emperor Menelik, and representative of the British owned national bank of Egypt reached an agreement. At first the emperor didn't accept the idea at least not until the British begged the Patriarch of the Egyptian Orthodox church to sell the idea to Menelik. By February 16, 1906, Bank of Abyssinia was inaugurated as the first financial firm in Ethiopia. How did Britain used Egypt to expand fractional reserve banking? We knew you would ask. Egypt tired of the rivalry between the two oldest civilization over the Nile decided to end Ethiopians threat of diverting the river. Hence it invaded Ethiopia expecting an easy win, instead Egyptian Army was crushed in 1876. Thereafter Egypt declared bankruptcy and soon after fell in the hands of its creditors, the British.

Haile Selassie Regime 

During Haile Selassie's regime private banks flourished and most were foreign owned. Access to capital led to the formation of factories, commercial farms, and other industries.There was even a stock market then, a prime example that used the stock market to raise capital is Anbessa City bus. Sometimes we wonder where Ethiopia would be today if the free market was never interrupted by central planners.

The Derg Junta

The downside of the Derg began almost as soon as it over threw the Haile Selassie regime. After assuming power, it nationalized every sector of the economy. From the many few banks that existed, to only three state owned banks. Instead of letting the invisible hand allocate scarce resources, the Derg commanded the economy. Problem was more and more money was being spent on the military, leaving no money or fewer resources to the average citizen. In addition almost all industries that were run by the Junta were never profitable, destroying the cash in circulation. There was no productivity in the economy, we weren't alive then dear reader but we can imagine cash was hard to come by. Forget inflation or life being expensive, you would be lucky to get basic items the government was rationing.  

EPRDF Regime

By 1989 communism was for the history books, so was the Derg Junta. The Ethiopian People Revolutionary Democratic front, led by the late prime minister Meles Zenawi assumed power in 1991. Leaving the politics  for the world improvers, we will analyze the economic policy that is contributing to the double digit inflation. Despite been known for its communistic ideology at its roots, the party found itself in a world without the Soviet Union. Thus the closest model they can mimic was China. The government spends money on public goods, while a combination of state owned and private industries produce the goods. But first there is damage control which is steering the command economy to a free market. Once the country was stabilized from the transition of power and capitalism was allowed, private banks started opening their doors for business after a long vacation. And for every choice you make there is a consequence or opportunity cost. We suspect the following to be the cause root of inflation or the unintended consequences of choosing some form of capitalism.

Banking

Toady in Ethiopia there are a total of 15 private banks and 3 state owned banks. Assuming we all have agreed how banks operate all over the world, can you imagine how much money it has been created since Dashen, the first private bank became operational in 1995? To refresh your memory of how banks make their money across the planet, we will repeat ourselves. Its called Fractional Reserve System, which is a form of banking, in which a bank holds a tiny percentage of total deposits. For example say Abebe walks in Dashen bank and deposits ETB 1000, he then goes to continues his daily life. Mean while Dashen Bank hopes Abebe doesn't come back anytime soon to withdraw his deposit. As it is the case in Ethiopia, the national bank acts as a regulator (central bank) and demands Dashen bank to keep 10% of Abebes deposit calling it the reserve ratio. Which leaves Dashen bank with ETB 900 for its banking activity mostly for lending. Since Dashen is the only bank in town various people would need its services for different purposes. If the bank can manage to find nine other souls to lend ETB 100 each too, that would increase the money supply by 900%. As long as those nine souls spend the money inside the country in whatever form, demand for whatever goods or service the money they borrowed is chasing will sky rocket. So far a total of 18 banks are playing the game in hundreds of millions of ETB using the fractional reserve banking model, and almost all have been profitable to date. If that's the case, unlike the Derg that squandered money to the military, the free market is now allocating capital for productive use. Other wise how are the banks making money, unless most of their borrowers are repaying their loans? If there wasn't any profit to be made, we highly doubt the number of banks would reach 18.

Infrastructure

In order for free markets to function well, its is required that a country is up to date with its infrastructure. Ever since early 2000's the government has been building roads at unprecedented rate across the country. To build you need tools and human labor, which for the most part weren't utilized in the country for long time. What was once idle labor, is now working and earning an income. We doubt the average worker earns millions but we can assume he has now some money in his pocket that he/she didn't have before. When poor people first earn money they don't spend it on luxuries items instead they prefer to eat better. Previously either food aid or kolo was feeding the majority, would it be a sin to assume now they can afford one full meal per day? And also don't forget the construction sector. The real estate boom in residential, office buildings, Industrial parks, hotels, universities, health centers, dry ports, railway, dams etc are being built now. Directly and indirectly millions are earning some money from this activities.

Remittance 

The Dollars, Euros, and Pounds, the diaspora has been sending to help family members has been increasing year over year. This is a double edge sword, it can be good and bad. Good because many depend on this as their sole income, which then enables them to feed themselves. Bad because this isn't money earned by producing a good or service. There was no cost at the receivers end, he/she isn't simply replacing the cost of production of a good or service. Its new money that's entering the economy, which forces the national bank of Ethiopia to print 17 ETB for every $1 received.

The collective income of the millions that are employed alongside the remittance have a huge impact on a small economy like Ethiopia. If we aren't mistaken the economy just doubled within the past five years and now stands close to $50 Billion. But also, Microsoft founder Bill Gates is worth $50 billion, but imagine this, if he spent $5 billion per year, five years from now he will be worth $25 Billion, We don't think Bill Gates would be happy with that. That means on average the Ethiopian economy was generating $5 billion additional worth of production per year for the past five years. If we are lucky enough like S.Korea, China, Taiwan, Brazil, by 2018 Ethiopia's Economy could be producing $75 billion or a Trillion Birr worth of goods and services. Unless we produce more and flood the market, we wont be able to afford much of anything. A classic example is cement, when we left Addis Ababa in 2002, a bag of cement was no more than 50 ETB. As soon as the country began building the necessary infrastructure to accommodate a modern economy the price of cement hit the roof to 500 ETB. We also recall there were only 3 state owned cement factories that couldn't satisfy demand. Today there are 15 more cement factories flooding the market, when the newest factory was inaugurated in February 2012, the price of cement collapsed to 160 ETB. To us, it seems like the Ethiopians are demanding a lot of stuff but aren't yet producing enough to satisfy the demand that exists. Too much money for a small economy chasing few goods. Classic definition of inflation we would say.

Regards,
Eskinder Haile
 

Nuro Lemin Tewedede? Part 1

•  The basics first and the jargon's later...
• In order to understand why inflation is in double digits in Ethiopia, it is important to understand the monetary system of the World and its history

Dear reader we want to start by apologizing first. When we left Addis Ababa, Coca cola was only ETB 1.50, the Chinese Just began building the ring road, we were spending precious time playing soccer with our comrades, going to school, or anything imaginable you would think a 12 year old would be doing. Give us a chance dear reader as we have a lot to say on the Ethiopian Economy, what we have to say might be a little different as many of you are use to reading content from endangered species. As we promised we will start with the basics and answer few questions.

1. What Is Economics?

 Economics is the study of making choices, in simple terms that is. As humans we have unlimited wants, but mother nature have limited resources. What do we mean by that? Well dear reader, don't we all want to go to the best schools, drive the best car, buy the luxuriest house on the bloc etc..? We do but for the majority of us our resources are so limited many of our wants are just dreams, therefore forcing us to make choices.


    2.  What is Inflation?

Inflation is a rise in the level of prices of goods and services in an economy over a period of time.Which leads to a decline in your purchasing power, in which case you will need to ditch your wallet and switch to alternative methods to carry more paper money.


  3. What Causes Inflation?

Inflation has many different causes for too many different reasons. In our case we are just concerned as to why Ethiopia is experiencing double digit inflation, that has not been experienced in the history of the nation, or at least since the country's statistic agency learned how to count. To understand inflation its a must to know how money is created and ends in our pocket. I am sure you wonder where money comes from, dear reader hope we haven't lost you yet. You have probably said my job provides me with the income "Duhhh", how about this, have you wondered where your job got the money to pay you? Again you might say "Duhhh" and respond from its client. You might be a nerd and you are really wondering how the company in the first place got the money to provide its goods or services. You might say hmm probably it raised capital from shareholders or borrowed money from the bank. So where did the shareholders or the bank get the money? OK dear reader we aren't here to make you think too much, that's our job and we hope one day we will use it to change our country.

During the renaissance era, the Medici in Italy were a dominant merchants of their time. They were so profitable, they began to lend their savings or extend credit to customers. Since they used their hard earned money, they demanded interest on the funds they lent out. Banking as we know it was born, and the Medici family became so wealthy, Soon the Italian city states were borrowing cash in the form of bonds from the family.

By the 19th century most of Europe's finance was dictated by the Rothschild family. Mr. Mayer Amschel Rothschild, a German Jew began banking in Frankfurt in the early 1700's. Later he would send his five sons across European cities to establish branches and expand business. It is widely believed that the Rothschild family spread fractional reserve system which 99% of banks across the world use today.


  4. What is Fractional Reserve System?

 It is a form of banking, in which a bank holds a tiny percentage of total deposits. For example say Abebe walks in Dashen bank and deposits ETB 1000, he then goes to continues his daily life. Mean while Dashen Bank hopes Abebe doesn't come back anytime soon to withdraw his deposit. As it is the case in Ethiopia, the national bank acts as a regulator (central bank) and demands Dashen bank to keep 10% of Abebes deposit calling it the reserve ratio. Which leaves Dashen bank with ETB 900 for its banking activity mostly for lending. Since Dashen is the only bank in town various people would need its services for different purposes. If the bank can manage to find nine other souls to lend ETB 100 each too, that would increase the money supply by 900%. As long as those nine souls spend the money inside the country in whatever form, demand for whatever goods or service the money they borrowed is chasing will sky rocket.


It is widely believed after being so successful in Europe, the Rothschild smelled yet again another opportunity. This time they wanted to expand across the Atlantic in the newly born nation of the united states of America. If you have read the federalist papers which were a collection of essays promoting the soon to be constitution of the new nation, you would have noticed Alexander Hamilton's strong position on establishing a central bank. Despite strong resistance from the other founding fathers like James Madison and Thomas Jefferson fearing corporate influence and the destruction fractional reserve system brings. In order to establish "financial order and credit to the new nation and individuals" argued Alexander Hamilton a central bank was a necessity. To open its doors for business the new bank required $10 million in capital, of which the U.S government would purchase $2 million worth of shares. Raising a rhetorical question, the opposition camp asked where would the U.S government come up with $2 million? Hamilton was quick to respond and proposed the U.S government to borrow the $2 million from the soon to be bank. If the bank was looking for capital to establish itself, how would it lend to the U.S gov? We suspect the clever Rothschild family to supply the seed money. This isn't science fiction by the way dear reader nor a conspiracy theory. Alexander Hamilton was chosen the first U.S secretary of treasury and the rest was history as they say.

Oh emama Ethiopia we haven't forgot you, nor so far blamed anyone for your double digit inflation. We were just trying to understand the concept of money, so we can try to understand why doro (chicken) carries a Coach purse in the streets of Addis Ababa. That's how a dear friend of ours explained what inflation meant to him. In part two we will focus entirely on the Ethiopian economy and will try to answer why there is inflation, where is it coming from, is inflation telling us something and many more.

Regards,

Eskinder Haile