He argued that the rates were crazy and there is no basis (pricing model) for the rates. But he could not tell me either what the basis or pricing model was for insisting that the value of a bond note is the same as the United States dollar as intended by Mugabe’s decree.
I argued there was a basis for parallel market pricing.
The basis is rationalism.
Rationalism is the philosophy that knowledge or actions are driven by reason, logic and intuition.
This philosophy brought into economics the notion of homo economicus, or economic man or rational man; which suggests that humans are consistently rational agents that pursue narrow self-interests to maximise utility (satisfaction).
Although the thinking around the rational man came centuries later through John Stuart Mill and others, Smith had noted this already when he pointed out that: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
We could argue as well that it is not from the benevolence of the Reserve Bank of Zimbabwe governor, the president or the minister of finance that they fix the rate of the bond notes to that of the United States dollar and insist the two currencies are equal, but from their regard to their self-interest – and if I may add, political self-preservation, which gives them access to power, money and control.
So what drives the parallel market rates.
As I told Busisa Moyo, it’s a simple case of supply and demand.
The scarcer the United States dollars, the higher the value of Zimbabwe dollars (defined as bond notes, digital bank balances and other instruments) you must offer for US dollars.
President Mugabe admitted on national television this year that he also now keeps cash at home (I am not sure which bank gives him that cash), he is just being a rational man.
If you also keep cash at home, you are just being a rational man.
If I keep cash in my home, I am just being a rational man.
If the next guy hasn’t got the United States dollars cash, but badly needs them, and he wants to exchange them for the Zimbabwe dollar as (defined above), the rational man, in pursuit of his own self-interest and not charity, will have to charge a price for them.
If the one with Zimbabwe dollars want the United States dollars badly enough, he will have to pay or negotiate an exchange rate.
It’s how things work in the market that officials have chosen to refer to in pejorative terms like a parallel market or black market.
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