- 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.
- What Is Economics?
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
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