The US printed over $13 trillion during COVID lockdowns, resulting in massive inflation at home and then around the world. Today, Kenya is caught between imported inflation caused by US monetary policy on the one hand, and loan repayments and stalled economic activity on the other.
By Peter Wanyonyi
November 1971 was a watershed moment for international economics and the United States (US) dollar. Up to that point, the US had maintained and honoured dollar-gold convertibility at market rates: back then, as now, countries settled their international accounts in dollars. But, unlike today, those dollars could – and frequently were – converted to gold at a fixed exchange rate of $35 per ounce, which was redeemable from the US government. Thus, the US was committed to backing every US dollar with gold, and other currencies were pegged to the dollar.
This model worked for a while, because the US had a prudent foreign policy and its economic and monetary policies were not driven by expensive foreign entanglements. But then it decided to try to prop up an unpopular and unwanted government in Vietnam, and was forced into a war that it had no business fighting and would eventually lose. The need to bankroll the government and puppet State of South Vietnam required billions of dollars – money that a dollar-pegged US could not manufacture out of thin air, since every dollar had to be backed up by physical gold.
Undeterred, the Americans decided to print billions of dollars to fund their war in Vietnam and the resultant expansion in foreign interventions abroad. Since the amount of gold the US held was fairly static and increased only very slowly, and the Americans were printing billions to bankroll their foreign policy adventures, the result was a loss of value of the US dollar, as more and more dollars were pegged against gold holdings that weren’t growing anywhere near as fast as the dollar-printing. By printing dollars to fund their wars, the Americans were devaluing the dollar against gold.
Foreign governments holding US dollar reserves felt helpless as they saw their dollar holdings losing value. To avoid losing everything in their reserves as the dollar lost value, they urged the US Treasury to stop printing dollars and hike interest rates, which would suck excess dollars out of world circulation and shore up the weakening dollar. The Americans weren’t interested: at an urgent meeting convened by European Finance Ministers in November 1971, John Connally, President Richard Nixon’s Treasury Secretary, bluntly told the Europeans, “The dollar is our currency, but it’s your problem.”
Europe panicked. The French immediately sent their US dollar reserves to the US Treasury and demanded the equivalent in gold. Dozens of countries around the world followed suit – and President Nixon realised he was presiding over an international run on the dollar as a reserve currency.
To try to restore confidence in the US dollar, he unveiled the measures called “The Nixon Shock”, the most significant of which were wage and price freezes, surcharges on imports, and the unilateral cancellation of the direct international convertibility of the US dollar to gold.
From that day on, countries around the world used the dollar not because it was convertible to gold, but because the US guaranteed its acceptance by economic and cultural leadership of the world, and by ‘gunboat diplomacy’ where any country leader who refuses to trade in dollars quickly finds himself out of a job and, frequently, on death row, thanks to Central Intelligence Agency machinations – as Muammar Gaddafi and Saddam Hussein discovered.
Most international trade needs dollars since most countries settle their international accounts in dollars. This means that when Kenya buys refined petroleum from Bahrain, for example, payments are made in dollars. But dollars aren’t printed in Kenya: while it costs only a few cents for the US Bureau of Engraving and Printing to produce a 100-dollar note, Kenya – and every other country – has to produce and sell $100 of actual goods or services in order to obtain that same note.
Fast forward to 2020, and the world has just been shut down by the COVID virus. American and Chinese government policy was used as an example to the world, to the eternal regret of everyone that did so: the entire world went into lockdown. That meant close to zero economic productivity – no one was exporting anything, since international supply chains had been shut down.
Kenya, rather unwisely, followed suit, despite ample evidence then – and even more evidence now, in hindsight – that the COVID virus posed a negligible risk to the largely youthful and very healthy Kenyan population. Uhuru Kenyatta’s shutdown of Kenya’s economy killed off our already meagre economic production overnight – suddenly we weren’t producing anything, and no tourists were allowed in, so we could not earn any dollars from exporting goods and services.
In the US, a beleaguered President Donald Trump was on the ropes, assailed by his Democrat Party opponents and their Establishment allies on the one hand, and enduring relentless blows from the media on the other. To his credit, he recognised the threat of COVID to America’s obese, ageing population very quickly, and moved to shut down incoming flights from China – which were the main vector of spreading COVID in those early days.
The Democrats and the media pounced on that, accusing him of xenophobia and anti-Asian racism. It was election year, the Asian vote is a huge element of American elections, and Trump caved: the Chinese flights kept coming in, helping to create a COVID nightmare for the US and making lockdowns inevitable but for political reasons, not medical ones.
The damage was already done, however, and the Democrats “won” the presidency in a creative manner not unlike how Kibaki “won” the 2007 Kenyan presidential elections. New president Joe Biden extended the lockdowns and swiftly imposed vaccine mandates on the US. This resulted to a huge fall of US economic productivity, sky-high unemployment, and a social and financial crisis of mega proportions.
To regroup, Biden resorted to the Nixon strategy. He printed trillions of dollars in stimulus payments to US companies, keeping them in business and to ensure they didn’t sack (any) employees, even when they weren’t selling much to anyone thanks to the lockdowns.
While World War II cost the US a total of $5 trillion in 2023 dollars, Biden printed over $13 trillion during the COVID lockdowns. This was a massive flood of liquidity, and it was always going to be a problem for the world as COVID ended, and the world economy reopened, the lagging effect of this huge money supply began to be felt as a wave of inflation in the US at first, and then around the world.
Energy prices in the US jumped nearly 40% under Biden, while inflation – which was at 0.2% under Trump – jumped to over 8% under Biden. Americans were feeling the heat, wages were losing value, and Biden was in trouble in his very first term. The ideal solution to inflation is to suck money from circulation, and the way to do that most readily is to hike interest rates and thus make government debt attractive. That’s exactly what the Americans did beginning 2021.
Kenyan stock market
When America hikes interest rates, however, the rest of the world feels the pain. Because American government debt is a guaranteed return in the world’s reserve currency – the dollar – it is always far more attractive to invest in US government debt than it is to invest in emerging markets like Kenya. Thus, as US interest rates went up, international money invested in the Kenyan stock market and in Kenyan government debt was liquidated and moved to US government debt. The effect of this has been two-fold.
First, these liquidated investments could only be relocated abroad in dollars, so transferring them to overseas banks sucked dollars from Kenya’s economy. This created inflation as the same amount of Kenya shillings in circulation was suddenly chasing a dwindling US dollar reserve amount, piling pressure on the shilling, and seeing it lose value heavily against the dollar.
The second problem exacerbated the first as Kenya is a huge importer, and nothing is more important to the Kenyan economy than fuel, which underpins the cost of everything. Since everything in Kenya needs petroleum fuel, the falling shilling has pushed up the cost of fuel in Kenya, massively. In fact, as with Europe back in the 1970s, the US dollar is America’s currency, which is now our problem.
As these twin shocks were assaulting the Kenyan economy, which was also trying to recover from Uhuru Kenyatta’s ruinous COVID lockdowns, a third shock arrived – Russia invaded Ukraine. The West imposed sanctions on Russian exports, while Ukraine’s exports of grain to Africa immediately collapsed. The result was devastating, with food and oil prices going up, and all at a time when Kenya’s own inflation was hitting levels that hadn’t been seen since 1993.
The combined effect of these economic and geopolitical events can be seen in your energy and grocery bills this month – the shilling is tanking, the prices of commodities and services are unthinkable, and the cost of fuel is unbelievable. Much of this would have been manageable even for Kenya, though, were it not for the final knockout blow: loan repayments.
As was covered by the Nairobi Business Monthly last month (“Why targeting hustlers is a mistake”, July 14, 2023 issue), Uhuru Kenyatta and his political partner Raila Odinga committed Kenya to a suicidal loan-borrowing binge in the last few years of Uhuru’s second term in office, bequeathing William Ruto a poisoned economic chalice.
And so, William Ruto’s regime is caught between the Scylla of imported inflation caused by US monetary policy on the one hand, and the Charybdis of loan repayments and stalled economic activity caused by Uhuru and Raila’s economic and monetary decisions of 2018 to 2022 on the other hand.
It does not help matters that Ruto is seen, rightly or wrongly, as trying to revive the imperial powers of the Moi Presidency, with his ministers issuing roadside “dictatorial” declarations and making up economic policy on the fly. Even worse, Ruto himself is engaging in unwise geopolitical manoeuvring, seemingly, in defiance of his own administration and, in apparent ignorance of long-established Kenya policy, such as his hasty pronouncements on Western Sahara and Sudan. This is a recipe for economic and geopolitical disaster, as it suppresses difference in opinion, and sends the signal to investors that Kenyan policy is unstable and is created on a whim by the president and his acolytes. Investors are thus rightly hesitant to bring their money in, making matters worse for the economy.
The opposition (Azimio La Umoja One Kenya) appears to point the finger at Ruto regarding the current economic malaise, however, what is happening would cut across. Things would not be better economically, even if Odinga was in power – when it comes to inflation and economics, there is no magic bullet.
Uhuru and Raila made an economic bed for us and we must lie on it. High taxes and inflation are here to stay, and their offspring, which include high interest rates and economic stagnation, is the price we pay for letting Uhuru and Raila get away with bad economic, political, and foreign policies. It will get worse before it gets better.
Writer is an information systems