In 1932, USA President Franklin Roosevelt, fresh from winning his first term, was faced with the same crisis President William Ruto is currently facing economically. The USA’s turmoil was so severe, it was called the Great Depression.
In all soberness, Kenya, much of Africa and a large portion of the world are staring at a similar crisis. Kenya’s inflation at 9 per cent has caused a lot of apprehension, with prices rising steadily. This then speaks of the general direction the solution will come from. The answers cannot come from using the same model the world has been using for a century now.
President Roosevelt knew about this through his economic advisors, especially John Maynard Keynes who offered a contrary model known as Keynesianism. His method was extremely effective that it not only rescued USA from the grips of a depression, but within five years, America was back to its superpower status. How do you come from a depression, back to superpower status, to funding the second world war, all within 10 year?
The answer lies in what Keynes discovered; the Modern Monetary Theory (MMT). It states that a Sovereign nation can never be broke. This is so because governments are not currency users, they are currency issuers and the rules or status for an issuer differs foundationally from those of currency users. A nation's government is the exclusive source of its currency, meaning that the Kenya shilling has no other source other than the Kenya government. How then can a nation run broke of a commodity whose supply is limitless and it is the sole supplier of that commodity?
President Roosevelt used MMT by ordering for the creation of national infrastructure projects, large labour intensive public works programmes and a wide series of arts and creative projects, which created high demand. To fund it, he didn’t rely on taxes that had diminished with the depression, he instead printed the money. Yes, he printed and spent it on these projects that spurred mass employment and mass supply of goods and services. This initiated massive supply to fulfill the large government orchestrated demand.
This immediately spurred growth, cash flow and confidence and the economy’s upward trajectory began. Bridges, schools, libraries, hospitals, roads and airports were built. Music, art, plays and songs were commissioned. Teachers, nurses, doctors, researchers, engineers, drivers, technicians and people from numerous other jobs categories were employed. Poverty was almost quashed and personal dignity was restored.
Deficit funding helps government avoid the catch-22 situation of either burdening citizens with new taxes or borrowing. It’s not about printing and funding as much as one can. No, there are limits and real dangers to over-creating, but the limit is and can never be financial since governments are currency issuers. The real limit is inflation.
That said, inflation isn’t an automatic occurrence of deficit spending. Due to the economic downturn since 2020, Kenya has enormous slack and this tool can be used to employ hundreds of thousands of unemployed and have them work in production such as agriculture, dam creation, manufacturing, it can be used to increase the SME financing through the Hustler Fund to figures such as Sh35,000 per entrepreneur, and it can be used to decrease the cost of fuel by Deficit Funding the Sh62. Fuel prices can be reduced by the same amount and yet government will have maintained its revenue, which will most certainly reduce inflation by 2 to 3 per cent. What is critical will be a Pre Disbursement Inflation Analysis that will determine areas of funding, amounts to fund etc. With this the inflation question is answered pre spending.
The other category this tool can be useful at is international barter trade. We can’t print local currency for international use, but in concert with a foreign central bank, we can both utilise this tool to pay the local import/export trader. Take Kenya and Pakistan for example. Pakistan purchases 50 per cent of Kenya’s tea and Kenya imports thousands of tonnes of Pakistan rice. Pakistan is currently in a severe crisis and only has three weeks of import cover available in USD dollars. As much as Pakistan has accepted to cluster our tea as an essential commodity, which means we are in the list of those prioritised to be paid in those scarce dollars, that victory is short-lived. They are in a recession facing great dollar shortage pressures and may soon also default on the essential commodity list.
According to online sources, the average export value of Kenya’s tea to Pakistan over the last five years is $500 minion or Sh65 billion per annum. The Kenya Central Bank can, through Deficit Funding, pay KTDA the Kenyan shilling equivalent of proven tea being exported to Pakistan.
This will guarantee payments to the Kenya traders and farmers and stabilise the tea sub sector and halt a seemingly inevitable national crisis. This won’t result in inflation since it’s a replacement of monies that would have circulated into the Kenyan economy should Pakistan not have had its crisis. Economic solutions abound if we opt to remove the current economic lens and put on a new lens.