Tuesday, July 14, 2009

Hyper-inflation in Zimbabwe: How many zeros in a quadrillion?

Inflation is always and everywhere a monetary phenomenon - Milton Friedman
Hyperinflation is always and everywhere a political phenomenon - Niall Ferguson, The Ascent of Money

Reading Niall Ferguson's The Ascent of Money recently, I became interested in reading up on the current state of the Zimbabwean hyperinflationary situation. Here is my conclusion: Inflation in Zimbabwe today has gone beyond 'shocking', past 'sensational', crossed 'fantastic', and is now in the range of the utterly farcical. In fact, there isn't any more a meaningful way for us to talk about inflation in Zimbabwe, because the local currency is defunct, basic good are not available to be bought with it, the central bank has stopped publishing official inflation numbers, the finance minister has accepted 'the death of the Zimbabwean dollar' and the economic planning minister has suspended the currency for at least a year. [And really? There was an economic planning ministry?]

Here are the key storylines, the best I could figure out:
  • Zimbabwe has had four different currencies so far. It has now finally given up on all of them, and has opened up its economy to global currencies. Mith most economic activities take place based on South African Rand, USD, Euro, Pound sterling, and Botswana Pula.
  • The first dollar was introduced in 1980 and at that time the exchange rate was ZWD 1 = 1.47 USD
  • This currency fell in value dramatically and was phased out in 2006. A new devalued currency was introduced (also called ZWD) with the new currency being worth 1000 of the old ZWD. So think of this as taking off 3 zeros from the old currency.
  • If the first currency had last 26 years, the second one lasted only 2. In 2008, with massive increases in money supply having eaten away at the ZWD's value, a third currency was introduced. This new Zimbabwean dollar, ZWR was worth 10 billion of the old ZWD. So think of this as the removal of a further 10 zeros from the second currency.
  • You know where this is going. The third currency lasted less than a year. In early 2009, a fourth Zimbabwean Dollar, ZWL was introduced. This took out a further 12 zeros from the third currency. So by this time, 25 zeros have been taken off the first currency introduced in 1980.
  • Annual inflation reached 100% in 2001. By 2006, it had reached 1,000%. By mid 2007, inflation was 10,000%. In Jan 2008, Zimbabwe's Central Statistical Office declared that inflation had crossed 100,000%. Within 4 months, in May 2008, inflation crossed 1 million percent. By Jun 2008, it had crossed 10 million percent. In July 2008, the Central Statistical Office published an inflation rate of 231 million percent. That must have broken their spirits completely, because they stopped publishing any figures after that.
  • This was the point at which Zimbabwe dumped its currency and started accepting foreign currencies as legal tender.

I came across this short slideshow with some superscary (and quite funny) images of Zimbabwe's hyperinflation. Check it out if you have a couple of minutes and see if it doesn't shake you up.

And while all this is happening in the economy, what is making news within Zimbabwe? Here are some recent headlines -
  • Chaos erupts at Zimbabwe constitution conference
  • Mugabe stalls government talks needed for new constitution
  • Bob's the only free Zimbabwean
  • Ministers in illicit rhino horn trade
  • Tsvangirai claims inflation 'under control', and
  • Zim Idol searches for superstar

Nero, anyone?


  1. Actually, hyperinflation of the Zimbabwean kind is easily understood. It simply implies that the public has no trust in fiat currency issued by the state, or the state's promise to pay the bearer the sum of....
    It also means that the state has no means to artificially control the value of the currency, by taking control of real assets; and that the government is powerless economically and otherwise.

    what I find very interesting is that very similar fundamentals exist in quite a few other countries where the state has been issues currency without the backing of any physical assets and the country is not producing anything of real value for the outside world to barter.

  2. That is really interesting. Two questions -
    1. I have heard it said that currency is 'paper backed by trust'. Is that a way you would frame it? Or do you think the 'trust' needs to be further backed by something tangible, like gold in the old world, but something else now, e.g. trade?
    2. Which countries are in your mind when you talk about basket-case fundamentals but currency is still holding up?

  3. The Zimbabweans clearly don't trust their government's paper, even if it is paper backed by trust!

    In the old days, the govt owned enough gold and the public accepted gold in exchange of their paper currency, because they could sell gold to outsiders. In our current context, if there is a run on the govt, it will have to give people internationally tradable assets to public (foreign currency, oil, agri commodities, land etc.) Most governments don't own enough assets to back their currency, so they will just inflate (or hyper inflate) their currency out - thereby reducing their debt to the public.

    At a country level, i would say poor economic fundamentals are not so important - public can take pain for some time (e.g. Japan). The more important is total currency outstanding vs. real assets held by govt. And what is very significant is that the US stopped sharing its total monetary base number a few years back. if the international lenders start showing up at the Fed, it could be a fun journey :-)

  4. The US is very powerful militarily and also not averse to misusing its power, so i would say my doomsday scenario is not likely to play out.