An Economics Question

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Since this is the closest thread for an economics question this is where it will be...

Ok, I need a help from someone who knows economics well or has it as an obssessive special interest, lmao.

Anyway, here is the question.

In my book, Mzingu Mtwetwe, and her development programs of Malawi actually make real progress in terms of human development and socioeconomic development with high growing per capita income, fast growth in GDP, and very high productivity in general but with one caveat.

Such rapid growth obviously causes inflation as cost of living increases with development. We seen how other governments handled this situation, devaluation of the currency, printing more money and/or wage and price controls. Mzingu Mtwetwe's solution is none of these. She proposes closing down the Reserve Bank of Malawi to cut down inflation. The question is what will happen with few kwacha in circulation in such a circumstance? Will it take the air out of the bubble?

if you laid all the economists end to end, you'd never reach a conclusion - Harry Truman...

This is talking about the money supply. Basic economics says supply and demand intersect at an ideal price.

What's happening is macroeconomics, primarily the money supply. Rapid growth requires ready capital, to fund all the projects underway. However, ready capital tends to have an effect on inflation, as more and more money goes into circulation.

Now the trick is how much money to inject into an economy. Each time you print a dollar, it generates a 'money multiplier' effect; you spend it for one dollars' worth of something, and the person you gave the dollar to spends it for their one dollars' worth of something, and on and on.

By closing the bank (which is a bit extreme), you'd cut the money supply to what it is now. This would have several effects.

1) The money supply, being cut, means that there would be an effect of drying up investment
dollars. This would lead to projects not being done, and people being laid off. Growth slows

2) The value of the money would increase by an unspecified amount, since it's suddenly
'scarce'. This would cut back on inflation to an extent, but might start 'deflation', where
money gets more and more valuable. This is surprisingly also a bad thing.

What economists argue incessantly about, is how much to cut or add, and what the end effect will be. Economics is as much about group psychology, and what crazy things money will make people do, as anything else.

It's kinda hard to say, until it happens.

If there is more wealth in a system, there should be more currency to represent the wealth. Increasing the money supply will not lead to devaluation unless it is greater than the increase in wealth. Governments that 'cheat' and print way too money suffer as there are too many dollars or dinars chasing the available goods and services; if the increase in currency reflects the real increase in goods and services, not a problem. No one really believes that the number of dollars in circulation in the US today should equal the number of dollars that were in circulation back in the day of Washington, Jefferson and Franklin - the country grew, the economy grew, the currency grew (although sometimes too fast).

Prosperity for one group (farmers, miners, bankers, computerists, or who ever) will give them more power to draw on resources outside of what they traditionally have done, and this increased demand cannot be eliminated (It can be redistributed through inflation or taxes). So growth itself should be seen as a factor that creates economic stress and inequality (at least short term).

If productivity in an economy increases, the average hour of labor represents more value - a laborer in rural Sri Lanka makes less than a laborer in Sweden.

If the increased prosperity drives up rent or food prices, hair dressers and taxi drivers should eventually raise their prices. Because providing their services to an affluent society represents more value than providing those services to a poorer society. If a boom in widget manufacture and export means many non-farmers can afford to eat more, food prices should go up in response to demand, which will reward farmers and restauranteurs, and encourage investment in those areas.

Removing the federal reserve? It will likely kill inflation in it's tracks, simply because central banks are usually associated with creating inflation, at least in less stable areas of the world, and such a radical move certainly shows the willingness to end inflation, which will adjust expectations dramatically.(assuming low counterfeiting)

At the same time, radical changes in the institutional structure of society can cause fear because of these changes, as individuals may feel as if the system has then reached a free-fall, and not only will there likely be a popping of the bubble but also a bit of a panic at the dramatic change in the monetary system. People will not expect inflation, but they will also not expect stability in the economy because of this.

Essentially though, the biggest role that this action will have in this situation is altering expectations. Not much else. At least, that is what I think about the matter.

Honestly a better move for that nation would have likely been pegging their currency, I think.