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!)

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