This may be more of a Great Debate than a General Question, but I’m hoping someone knows enough about economy to understand something I don’t. So Zimbabwe went through a period of massive hyperinflation in 2007-2009, and then stopped using its own currency. They tried again in 2019 and while the current inflation isn’t anywhere near what it was at its worst, it’s still huge and there were only nine months in which Zimbabwe didn’t use foreign currency before they got back at it again.
Why does this happen in Zimbabwe, specifically? I understand it’s a poor African country with all the disadvantages that comes along, but so are its neighbors Botswana and Mozambique, and they use their own currency while keeping inflation in the single digits. Zambia also borders Zimbabwe and apparently has inflation in the low double digits, but that’s still way below Zimbabwe’s high triple digits. Why is this a recurring problem for Zimbabwe and not for its neighbors?
When they first took power, they instituted “land reform”.
In theory, they took land away from white colonialist oligarchs, and redistributed it to the people.
In practice, they took land away from people who were educated and experienced in agriculture, and redistributed it to presidential cronies and party apparatchiks.
They did the same with the industrial sector, and the mercantile sector.
Just a nitpick, but Botswana is by no stretch a poor country (it is African, though, so on that I agree.) Their per-capita GDP is $8000 at exchange rate, or $18000 at PPP, which is solidly middle-income. Its HDI is 0.735, which puts is 100th (out of 189), so solidly middle-of-the-pack. Zimbabwe’s numbers, respectively, for comparison, are $1424, $2621, and 0.571 (150th).
Simply put, the Zimbabwe government believed that all it had to do to pay its bills was print money, like the Confederates did in the American Civil War. This just does not work, as attested by examples dating back to ancient China.
Money is no different from anything else. The more there is of it, the less value it has. Most modern central banks make an effort to balance money supply against the demand, so prices remain stable - the value of a dollar/mark/pound/whatever, vs. a simple commodity like a loaf of bread or a gallon of gas. If there’s too much money floating around, merchants will raise their prices. If every civil servant who comes into the bakery has a wallet full of dozens of $100 bills, the baker is going to want more than $1 for a loaf of bread. If a loaf of bread costs a week’s wages, the baker will have to lower his prices. If a farmer has a truckload of potatoes, he will sell them to whoever offers the most money for potatoes. And so on, with everything everyone makes and sells or does work for…
If the government solution to “we don’t have money” is for the government to print more, instead of raising taxes so everyone pays for what the government needs, then people will see that there is too much money floating around for what value the country produces (GDP).
For smaller countries, there’s the added complication that many saleable goods come from outside, so the local currency must be exchanged for a currency acceptable to the foreign seller. That means - what does the country have that foreigners also want to buy?
Adam Smith centuries ago argued there was the equivalent of an “invisible hand” setting prices according to what thousands of people trading all sorts of goods perceived the value to be, relative to what money they had to pay for those goods. Too much money, prices go up.
Exactly. If I have a bushel of tomatoes and you give me a piece of paper with “20” written on it, green, with a picture of Andrew Jackson, that has no intrinsic value. I accept it only because I know, and have continuing confidence, that I can take that green piece of paper with Andy on it down to the diner and have lunch, or give it to the neighbor kid to cut the grass, or buy a case of beer, or whatever. The US government who issued the money, I am confident, has responsibly printed those pieces of paper so that they are stable and act as a store of value.
If I and others start losing that confidence, then I need more of those pieces of paper with larger numbers on them because all fiat money is based on trust.
So back to the OP, when Zimbabwe starts taking productive land from farmers and giving it to people who can’t farm, and then just “printing” (that term is always used colloquially; money can be electronically created) money, you come to realize that your government is irresponsible and you lose that trust.
That is true. But you have to pay the printers (I suppose Giesecke+Devrient in this case) and for the 747 full of banknotes to come deliver them, and I daresay they do not accept Zimbabwean dollars…
My point was that I don’t even need green pieces of paper with dead white guys’ pictures on them. I just login to my bank account and see numbers, and I am satisfied with that. And more importantly, so are most other people.
And they are happy with me changing the numbers they see on their computer as payment.
The part I don’t understand is, how are they ABLE to do this again? OK, so originally, they owed a gazillion dollars to their creditors, so they printed up a gazillion dollars to pay them. But having done that once, who would ever trust them with any sort of debt again? If I’m making any sort of deal with a government (or business or person or any other sort of economic entity) who’s done things like that, I’m going to demand payment up front or no deal.
Zimbabwe is and remains an irresponsible government that nobody should maintain any trust in the currency it “prints.” I was talking about USD, Euros, GBP, and Canadian Dollars (and as much as we like to poke fun at its currency and value, it is issued by a first world country and done responsibly) and others.
This is still GQ so there is no one answer to why people trust Zimbabwe or why anyone accepts their word on stuff.
There are several reasons and it’s simple enough, if you understand that the people in charge don’t always care about the consequences. Sometimes they do, as in Weimar Germany. But whether there or in Zimbabwe or Venezuela, it happened mostly because of politics.
Inflation is fundamentally an imbalance between the value and quantity of goods and services and the currency available for it. Under “normal” economic circumstances, there tends to be slow periods of mild inflation or deflation and then frequent, sometimes painful corrections when everyone realizes the value it too distorted. Because people don’t like those panics and crashes, and they are really quite destabilizing, we’ve invented various institutions and laws to moderate the amount of currency available and keep it within a “sensible” ratio. Broadly speaking, central bankers mostly prefer a mild rate of inflation because they feel it makes things easier in the long run, but that’s a huge tangent.
However, understand that this is, in part, a political solution to an economic problem. There is no one perfect, mathematically-true “correct” value of a currency, otherwise there would never be any confusion or problems with it. Money is not like other goods or services if you even want to consider it one of those at all: it’s a claim on future goods and services. In that sense it’s more like a stock or bond or even a contract instead of an apple or a lawn-mowing service or a ride-sharing gig. Humans have come up with a lot of clever methods to manage money, but, ultimately, its value is a matter of future expectations. An apple is a concrete item, and it has a concrete worth at a given moment to somebody, depending on whether they like apples or want to eat one within the near future, or whatever. A stock or a bond, or even bitcoin, is worth what somebody expects it will be worth in the future.
And this is where we get back to Zimbabwe, and Robert Mugabe’s politics. There’s a long history here, and depending on where you stand and when you’re talking about, Mugabe is either a hero or a Hitler. I am not going to try answering or explaining. However, as if often the way of countries with weak or very young political institutions, many of Zimbabwe’s leaders were, or grew to be, very corrupt. There were major rifts in society, and holding onto power looked pretty tough. Mugabe, and the Zanu-PF party, acted in a variety of ways that cemented their power despite corruption, wrecked the nation’s production of even basic goods and services, and partly as a result of the above resorted to running the printing presses to pay for it all. Explaining everything could get into some serious GD territory and is a very long story.
How does running the presses solve any of these problems? Well, it doesn’t. It won’t fix any of the problems and the value of the currency will decline rapidly. But of course, it works - just increasingly badly every time you do it. But there’s the thing. You can always add another “0” to the bills, right? So if the government has a bunch of bills to pay, it can always do so at the price of making future bills worse. And then, the easy solution is to just run the presses again for even more. Because the money-printing is inherently arbitrary, you can in theory always outstrip expectations.
The problem with this is that, as you failed to solve any of the previous problems and stacked on top the issue of inflation, people start to expect it. They know you’ve been doing this and once they realize that inflation is ever-increasing, they accommodate by correspondingly increases prices. Price changes go from happening annually to monthly, to weekly, to daily, and before you know it people are actually updating the price of goods by the hour. Once that happens, it’s nigh-impossible for a government to resolve the crisis without fundamentally re-assessing its position and rebuilding its economic legitimacy. But in most cases, certainly including Zimbabwe, the government is the problem so expecting it to be the solution often fails. What tends to happen in those cases is that the currency becomes effectively worthless and people adapt by simply adopting another currency entirely. This is often the U.S. dollar these days, but in the past has been anything from gold coins to cigarettes.
Right, but how does it have bills to pay? Having a bill to pay implies that someone already provided you with something, and now you have to pay for it. But surely, anyone dealing with Zimbabwe would make them pay first? And if the government said “Sure, we’ll pay first, let us just add a few zeroes to the notes first”, then whoever is dealing with them would likewise add a few zeroes to the price tag.
I think the answer is that they really are not able to do this again. Or at least, they can only survive temporarily until foreign goodwill runs out.
Switching to somebody else’s hard currency is a way out of a hyperinflationary spiral, precisely because your lack of autonomous control over the currency puts you in the same position as (say) a corporation in the U.S. that conducts business in USD. You cannot print money, so you can only obtain money from people who will lend to you or invest in you, and people will only do this if you act prudently and demonstrate a likely ability to repay. So for this to be sustainable, prudent economic policies are forced upon you. But from the article linked above:
In 2009… an emergency government of national unity, implemented a recovery plan centred on the adoption of the US dollar as legal tender. While this succeeded in curbing hyperinflation at the time, it has subsequently caused significant issues when it comes to obtaining foreign currency – particularly given the rest of the world’s reluctance to lend to Zimbabwe, which stems from the country’s failure to prove that it has learned its fiscal lesson. “What has come home to roost very recently is that [Zimbabwe] really has no way of sourcing any more dollars,” Chan told World Finance . “No one will lend to [it] anymore, because there never really was a viable repayment plan.”
And of course all attempts to circumvent this reckoning by reintroducing their own currency are also failing.
I think I see the confusion here. There are two major factors:
*It’s really hard to not do business if a governments it, and…
*Governments don’t normally buy small things on a credit card, and sometimes governments are the only “buyer” of really big things, which include programs like Social Security or the military.
This means that if a government willingly damages its own long-term position, they probably can. In general, some financial institutions will deal with even very questionable creditors, up to a point and for a certain risk premium. And governments who engage in serious, long-term mismanagement can get themselves into a lot of trouble.
The wonders of greed and capitalism.
The creditors who got hosed last time aren’t playing but somebody new will figure they can charge a sufficient risk premium to make the deal sufficiently lucrative.
This of course is the sort of situation the rest of the world gets nervous about whenever the US plays chicken with it’s debt ceiling. If/when the USD is no longer the global reserve currency then fiscal life get a bit more complicated for us and a whole lot more complicated and expensive for the US.
I think this is contradictory. What you are saying is technically true, that money is a claim on future goods and services, but it has a value now, today. As you said, that value is based on what people expect it to buy short, medium, and long term but my green picture of Andy Jackson is worth more today than it will be a year from now much more than a hundred years from now. Unless I’m ready to eat a bunch of tomatoes and those tomatoes give me a greater utility than the $20, the bill is worth more. Those tomatoes will be rotten in a week, but I’ll still have my $20.
When one speaks of hyperinflation, one is speaking of a scenario where I don’t have such confidence, that I don’t know if tomorrow my $20 will not even buy a single tomato or even a stick of bubble gum. When that happens money fails at its basic purpose; it is no longer a store of value and people start returning to the barter system or using something else as a substitute for money.