Wednesday, 30 July 2008

Zimbabwe announces currency to be divided by 10 billion

The Zimbabwean Central Bank governor, Gideon Gono, has announced that from 1 August 2008 there will be a new Zimbabwean dollar, worth 10 billion existing dollars. Link.

Is this the biggest zero-slashing exercise in the history of money? They are taking ten zeros off the end of their bank notes! The effect will be to reduce the typical price of a loaf bread from Z$250,000,000,000.00 to Z$25. That should be more convenient all round - and since they can't get the paper to print such large banknotes there will be a saving there as well. The old and new dollars will both circulate until the end of the year when the old ones will cease to be legal.

Of course, this all a complete nonsense. They will be adding more zeros to the new notes before you know it. The real future for the Zimbabwean dollar is oblivion. Possibly Zimbabwe will enter the "Rand zone" and adopt the South African Rand as its official currency. Zimbabwe only really exists due to the generosity of the South Africans anyway. They could try to adopt the US dollar, like various failed South American states have done - with some success (Equador) and some failure (Argentina).

Or, idea from the left field here, the Chinese are muscling into the African continent; how about a Yuan peg?

Thursday, 24 July 2008

Hyperinflation in Zimbabwe

Zimbabwe is in dire straights. Their inflation rate passed ten thousand percent a few months ago; some estimate it now as one million percent, but it can't actually be calculated because the basket of goods is empty! With nothing on the shelves it's not possible to work out an RPI number.

They tried various things to halt the inflation. They made it illegal to put prices up; they said we'll confiscate your business if you do - and they did confiscate a lot of businesses. But law cannot control the market; goods will leave shops by the back door if they can't leave by the front.

Zimbabwean banknotes have been acquiring more and more zeroes to keep the wheels of commerce lubricated. And this can sometimes work. The French successfully converted old Francs into new Francs by dividing by 100 and the new Franc stayed good until the introduction of the Euro.

But not in Zim. And anyway they've run out of paper to print the banknotes. The classic solution to this is to recall old notes and stamp a couple of extra zeros on them. Perhaps they'll do that.

So we have a text-book example of end-stage hyperinflation coming up! We should be grateful at the once-in-several-generations opportunity to see this rare economic beast in the flesh. In the last stage banknotes are burned as soon as they are printed since they are worth more as fuel (this happened in the German Weimar republic.)

Of course Zimbabwe already has a complete parallel economy. If you actually want to buy something from somebody you first arrange for your friend in the UK to pay his friend in the UK £1 and then as soon as the seller gets confirmation from his friend it's yours. A simple barter economy may also arise, although this is highly vulnerable to the cops turning up and nicking all your stuff so is less popular than the foreign-proxy scheme.

Another characteristic of the terminal economy is goods being repackaged in smaller and smaller units. Where previously you bought a packet of fags now you buy them individually; eventually they will just snip you the end off a fag to make it stretch even further.

And what does President Mugabe think of this? He LURRVVES it! You see Zimbabwe receives foreign aid in hard currencies. The government gets the aid and distributes it to its supporters. The poorer the people are the bigger the wealth difference between the regime and the plebs; hence the bigger the power gap and so government is more secure. Money is power and Big Bad Bob is the one who's got the cash.

(And now an irrelevant aside - anyone want to get rich quick? The Indian 1 rupee coin is currently worth 35x more as scrap metal than as a coin. Fill yer boots!)

Retail "growth" in June slightly more believable

Today we have the retail growth number for June. It's a fall of 3.9 percent.

Last month the Office of National Statistics announced that retail growth was 3.6% in May, and I announced here that this number was derived by their tea ladies peering into the dregs.

This fall of almost four percent however is actually believable. It's what you would expect given the Bank of England's abdication of their duty to control inflation. Food costs more; clothing costs more; the only things which cost less are the things you only buy every few years such as laptops and ipods.

There is far more pain to come.

Tuesday, 15 July 2008

Inflation getting worse

Today we have the inflation numbers for the year to end-of-June. They don't look pretty:

CPI.....: 3.8% (up from 3.3% last month)
RPI.....: 4.6% (up from 4.3% last month)

In case you'd forgotten, the CPI target is 2 percent, and its absolute upper bound is supposed to be 3 percent. It's roaring away. The Bank of England thinks it might hit 4% by the end of the year; I think if it's still under 6% we should count ourselves lucky.

It's only been a couple of days since the MPC met at the Bank of England and took a sanguine view that inflation was not a problem and interest rates could be left at 5%. This seems like a complete abdication of their responsibility. I don't think they really care anymore.

We have also had Alistair Darling all over the TV and radio asking for pay restraint to contain inflation. (So inflation is a problem after all, huh?) What he seems not to "get" is that the inflation in the UK is coming in from abroad; oil and food prices are rising due to increased consumption in the Far East. Pay restraint in the UK isn't going solve that; if anything it would make the pain worse. Only a base rate rise to stoke the value of sterling can fix this problem. Although cutting taxes would offset the damage to some extent.

Is the man stupid, or something?

Thursday, 10 July 2008

Bank of England Fails

The Bank of England is charged with ensuring that those pretty scraps of paper we use as money retain their value. It's important that someone does this as scraps of paper have an innate tendency to devalue to their actual paper value. This task of making sure money keeps its value is called, “controlling inflation”, and when New Labour came to power in 1997 they formed the Monetary Policy Committee of the Bank of England and gave it the power to set interest rates. The general rule is: the higher they set the interest rates the higher the value of those scraps of paper. (The reason scraps of paper can lose their value is because it’s too easy to make new ones; if we used something rare as money, a precious metal maybe, then there would be no need to worry about inflation, simple scarcity would keep the money valuable.)

So the MPC was tasked to ensure sterling retained its value by keeping inflation, measured by the Consumer Prices Index, low. Specifically they were told to make sure the Great British public didn’t lose more than two percent of its wealth every year by keeping CPI at 2% more-or-less; they were allowed a leeway of 1% either way.

You might think a 3% loss of wealth is still rather fearsome. And it has to be said that CPI is anyway not a good measure of inflation. It’s calculated from a basket of goods which does not include house prices - which are a significant expense to most people (be they owner-occupiers or renters they still have to “buy” housing one way or another.)

Last month’s CPI number was 3.3%. Today the MPC should have leapt into action to get than number below the 3% absolute cap they are tasked to enforce. They should have done that by raising the base rate from its current 5.0% level.

You may be wondering how raising interest rates would actually help reduce CPI. It’s like this: when interest rates are raised people with debts have to pay more to service them and so have less money to buy goods and services so suppliers have to hold their prices down; and, more people want to keep their savings in sterling so the value of the money goes up compared to foreign currencies and imported goods, eg oil, food, manufactured goods from China and the like, all become cheaper in Britain. This gives our scraps of paper more value.

How did the MPC acquit themselves in this solemn duty of keeping our money valuable today? Well, sad to say, they failed. Despite CPI being 65% over target they did not use the one and only weapon in their arsenal and raise interest rates. No, they held interest rates at 5.0%. They decided to let the theft of 3.3% of your wealth annually carry on unabated.

So everything you own is losing value; your house, your car, everything you’ve got in the UK has a value denominated in sterling - and sterling is losing its buying power. Even intangibles such as your pension rights are losing value. You will be poorer in your old age due to the MPC’s inaction today.

Frankly, flogging would be too good for the bastards!