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Monday, 6 February 2017

Myths of the Bond Notes

We have had the bond notes in circulation since October 2016. It is important that we look at what the critics and opponents of this piece of monetary policy were saying and how the bond notes have fared so far. The value of bond notes in circulation is now US$80 million. The public has accepted the so-called token currency.
The aim of this post is to debunk the myths and highlight the politicization of the bond notes issue. I hope this helps in boosting confidence into the general public on the bond notes.

The opponents of the bond notes cited a 16th-century economist, Thomas Gresham, who said that bad money chases away good money. The assumption from these bush economists was economic theories are cast in stone and can remain true even after five centuries of social,economic and technological advancements.To say the GreshamLaw applies to gold coins and to try and compare it to bond notes is like stretching the theory too far.

It was assumed that the bond notes were the bad money and the USA dollar was the good money. The bush economists failed to read that bond notes would carry the same value as the USA dollar. The Reserve bank governor had said this over and over again.

The bush economists had the printing of money myth at the center of their argument against the bond notes. This was derived from a classical theory of a lot of money chasing a few goods.
The bond notes, the critics said, will increase the money supply and cause inflation. The Reserve bank governor again said the value of bond notes to be released would be related to foreign currency inflow into the economy. The Reserve bank would not print money but will only release the bond notes as incentives tied to exports and inward remittances from the diaspora.

The opponents of the bond notes policy assumed that the
government will force people to accept a currency. It was said once the government releases the bond notes, the government would introduce foreign currency controls.

When the bond notes were introduced, quality of the bond notes was raised as an issue. It was a deliberate move to discourage the acceptance of the bond notes by the public. Issues were raised on the quality of the bond notes. A fading colour and a damaged bond dollar  coin were circulated on social media and on fake media sites.
The people of Zimbabwe knew that the aim and purpose of the pictures and dismissed the quality aspects of the token currency with equal contempt.

The bond notes and coins have disrupted the perception of the USA dollar as a sole value holder in our economy. It is no longer the de facto currency.
This above point put the token money at the center of our banking system. It means the Reserve Bank role as bank of last resort is back . This also means the government can at times have the power to intervene in the economy via the Reserve Bank of Zimbabwe.
This is the power that our detractors is afraid of. The power to intervene in our economy has moved into the hands of Government and is no longer determined by foreigners outside Zimbabwe.