Hyperinflation - why Zimbabwe?

Factual Questions
21

Old joke variously attributed to Russia or Argentina during hyperinflation:
Q: What’s cheaper, the bus or a taxi?
A: The taxi, because you don’t have to pay the fare until the end of the ride.

Also keep in mind, most “shit-hole countries” (to coin a phrase) don’t get to borrow money internationally in the local currency - they borrow and must repay in US Dollars and Euros; how they get the money to repay those debts is up to them, not the lender. Defaulting on a loan means that nobody will lend until a means of sorting out previous debt is established. Those fine folk in international banking seem to treat this as a game of musical chairs… Hope their debt is paid before the country runs out of foreign cash and so the next guy is the one stuck with a bad debt. “Negotiating” a solution to default usually involves the creditor taking a discount on repayment - so the community makes up for this with high interest rates so they don’t lose in the long run.

These countries can use assorted tricks to get foreign currency - besides foreign aid, they set absurdly inaccurate exchange rates that are mandatory for visitors or those actually selling stuff abroad - to create a rake-off that the government absconds with. (And conveniently creating a black market in the local currency conversion). Another trick is forbidding foreign accounts and holding foreign cash, thus forcing citizens to convert any holdings - at those mandated exchange rates.

As mentioned above, Mugabe had used the excuse “taking back the land from our white colonial oppressors”. He nationalized the land and instead of giving it to people who needed it and might use it, distributed to cronies and party hangers-on who had better things to do than farm. The white farmers had large spreads and could practice mechanized farming - all this fancy machinery has been rusting to pieces unused now. The local farm hands who might have benefited from the land didn’t get any. Going from mechanized farming to small manually cultivated plots (or worse, no farming) significantly reduced the food produced in-country as well as that which could be exported for hard currency Running a kleptocracy where the government agents could swoop in and take anything of value reduces the incentive to accumulate visible wealth, reducing economic activity and ensuring that people instead hoard valuables (preferably not printed money) for possible hard times coming…

What debts does the government have? Buying all those villas and paying for food for the guards and mistresses is expensive. So many civil servants pretending to work who are the extended family of one minister or another - they get paid in cash printed by the central bank. The government vehicles fill up with gasoline and pay with cash. Ditto when they order paper and toner, etc. Note the word “order”. you decline to fill a government order at your peril, unless your short-term plan involves closing the business and GTFO.

22

It is also not a joke because, remember, as soon as you get paid you only have a limited amount of time to get cash and hit up all the shops for you can for goods you can barter later (pairs of shoes in various sizes, whatever, as long as they are worth something), while everything is still open and there is anything left on the shelves. That means at least a cab ride or two.

23

One technique which seems to have been (apparently?) successful in Zimbabwe is not to deal with the corrupt government directly at all. For example, a Chinese megacorporate subsidiary will contract directly with a tobacco farmer for a certain quantity and quality of product to be delivered at an agreed price. The corporation lends the farmer seeds, fertilizer, machinery, insecticides, professional agronomists, hard currency, etc. The agricorp gets a supply of high-quality tobacco, the farmer gets the business as well as capital and collateral to expand their operation, and, of course, the government gets a cut.

24

You’re confusing “what it will be worth in the future” with “it will be worth more in the future”. There is no contradiction in what smilingbandit actually wrote. You accept that 20 because within the future you care about with regards to those 20 dollars, 20 dollars will still buy an amount of goods you consider acceptable.

25

We may be talking past each other, but his comment could be misinterpreted to say that money is worthless NOW and only worth something once you buy a tangible good or a service with it. To the contrary, it has value right now. The fact that you have confidence that you can pay the neighbor kid to mow the grass tomorrow with it means it is worth something right now and worth more than a tomato or a fleck of gold which maybe the neighbor kid won’t take.

26

That requires quite the mental acrobatics to even conceive of, let alone read into that post.

27

Maybe I’ve overread it. Wouldn’t be the first time I’ve been wrong.

But we do agree that money is valuable right? Econ 101. If I am a chicken farmer and need tomatoes, I don’t need to search the four corners of the earth to find a guy that has a surplus of tomatoes and a paucity of chickens. I simply go to the market and get “money” for my chickens just like the tomato farmer and we then pass around the money for our needs. That money is more valuable than my chickens because chickens only give me chicken (or eggs) whereas money can get me any good or service in the world, IF it is acting as a proper store of value.

28

I’m not sure whether you mis-understood my statement. I will grant that I’m getting into the philosophical roots of money itself, and we can always take this to another thread. Let me clarify a bit of a limitation on this: I am talking about modern money, not pre-modern. Pre-modern currency was mostly based in a physical good that could be exchanged, like gold or cowrie shells, or even cattle. We left that behind a long time ago and went towards things like credit and bank-notes, which have many advantages, but have the disadvantage of being future-oriented.

Money is worthless.

People don’t need, or even really have a use for, money except possibly in a sort of aesthetic sense. (They can enjoy the steadily-rising bank account numbers or perhaps appreciate the artistic sensibility and tactile pleasure of a crisp dollar bill, I suppose) Instead, they value the things money can buy. Depending on how your brain works, this is either a very obvious or monumentally stupid. It’s still true, at least for fiat currency, and it’s a good thing.

Now, I can already hear your objections. “What,” you perfectly correctly demand, “is the difference between valuing money based on now versus tomorrow? How does that affect anything in a practical sense?” Hopefully none! But money can be valued differently by different people at the same point in time let alone different ones.

We work, sell oddities on Etsy, or make Youtube Videos showing off our speedrunning for those sweet, sweet Patreon bucks, because we have faith that the currency we receive will be adequately valued in the future. We can’t eat physical dollars, let alone stray electrons in our bank accounts, and unlike gold or silver there’s effectively no value even in the dollars themselves. We do the thing, not in exchange for a concrete item, but for the faith and credit of having done the thing. The money is no more than an accounting notation to record that we created some kind of value.

To use your example above, the real transactions you’re doing involves exchanging chickens for tomatoes. Money is a an invisible tool which allows you move the value of your chickens through both space and time. You can borrow, to move money ahead in time (i.e., selling the chickens before they’re even hatched!), or keep some in the bank to effectively move it forward in time, by a season or even years. You can also move the chickens through space, so to speak. If you’re a chicken farmer, then essentially the dollars in your pocket are fractional chickens reduced to a convenient, portable paper format, or even stored in a database that you access anywhere in the world. The value, however, is entirely in the chicken and not the dollar.

Furthermore, economists have to account for human behaviors around money in various ways, which can get pretty weird depending because may believe in money in a fundamental way regardless.

All that is a really weird way of saying that money doesn’t exist - it’s a purely symbolic representation of actual, existing value in some form. That’s why I stated that money has no value “now” but only in the future, because at the moment of receiving the money, you are exchanging actual goods and services for something which is inherently worthless. Yes, I was being a bit over-dramatic about it, but treating this as a fact is somewhat foundational the function of modern markets.

29

Pretty easy to see that the money itself is worthless: if it were not, it would not be so cheap to create vast sums electronically, or even masses of banknotes. Indeed, that is how it works in this day and age.

30

So if you logged into your bank account in a couple of hours and saw that I sent you $10k, you would just shrug and say it was “worthless”? Could you send me some of your worthless money?

31

This is factually incorrect and the pettifoggery in your post doesn’t justify it. If money is “worthless” then send a Zelle payment to me. People literally kill each other for money. Again, maybe we are talking past each other, but that stack of green pictures of Ben Franklin has a lot of worth to a lot of people.

32

Now I have $10k, but the digital bits are not intrinsically “worth” anything. Economically speaking, this is “fiat money”. Its value to you is that you can get stuff in the economy using that money.

According to classical economists like Marx, its value is that you can consume it. Can’t eat banknotes, you have to spend them at a restaurant or something.

33

Apologies for the triple post, but this argument is like saying that if my wife goes to the grocery store on Friday and picks out a roast beef for Sunday afternoon that she is not really buying anything, only a promise of a possible meal on Sunday. We have to assume that we both don’t die before then, that there is no power outage, that there is no family emergency that will call us away from home, etc. Everything is only as good until you use it, and money lasts a hell of a lot longer than a roast beef. So, again maybe we are talking past each other, but I think the argument that money is worthless is pretty silly. Is a roast beef worthless?

34

Of course they are. They are worth $10k. The HVAC guy won’t exchange a whole house air conditioning unit with you for that? That’s value. How is it worthless? Will you give me $10k of your “worthless” money? Why not?

35

If bits are what you want, I can send you a lot of flash drives for much less than $10k…

36

Why is this important? Pretend it isn’t currency. It is a gift certificate issued by Walmart that entitled you to a family sized roast beef. Three scenarios:

  1. I tell you to come to the market and I’ll give you a roast beef on Sunday morning (my word is solid in the community),
  2. I hand you a $20 bill (a family sized roast is $20 including tax at Walmart),
  3. I hand you a gift certificate printed by Walmart for a family sized roast beef at Walmart.

You KNOW you can get a roast beef in all three scenarios. How is that worthless if I give you money?

37

This is the big nugget of truth, as I see it. The land redistribution is sort of a side-plot. The overall goal was redistribution of wealth, and printing currency is one way of redistributing wealth that’s denominated in that currency. That’s a big inflationary risk, but it becomes a virtual guarantee of inflation when there isn’t a surplus of productive capacity and the newly inflated wages are getting paid out to people who don’t actually produce anything.

By contrast the US could absorb a significant spike of inflation because we have a very high-productivity workforce whose real wages have been compressed dramatically, and a correspondingly large number of unproductive hoarders of cash and cash-equivalent assets. The inflation-panic propaganda we’re hearing in the US is coming from entities that hold a lot of dollar-denominated debt and would very much like to continue collecting interest on it instead of getting a real job.

38

  1. If you lend them money in Euros or US Dollars, they will have to pay the money back in Euros or US Dollars. Unless they want to default or restructure, a separate though very related issue.

  2. US debt is backed by the full faith and credit of the US government. And for years we believed it be so: US bonds were assumed to be risk-free. Assumed. In fact Sovereign Default and Debt Resturcturing has a very long history. And while irresponsible issuers of bonds are punished, it’s also true that some investors for some reason will come back asking for more.

39

It’s also coming from elderly retired people who don’t have the option of working, and who don’t want inflation to render their life savings worthless. It’s also coming from minimum-wage workers whose incomes don’t have automatic cost-of-living adjustments, whose expenses will rise much faster than their paychecks. Wiemar Germany was a lousy place to be poor.

40

More on the short memories of lenders. Abstract of NBER working paper, emphasis added:

This paper examines sovereign lending to Latin America and the Caribbean from 1820 to 1913. We examine four waves of capital flows where defaults were followed by a return to market access. In spite of extended default, countries kept promising high returns that attracted international investors again and again: financial autarky thus gave way to eras of high integration to global markets as measured by sovereign risk pricing. We discuss imperfections of the sovereign debt institutional context in the region and discuss a menu of options that some countries used to seek funds in the global financial markets after defaults. The parallel with the modern Latin American and Caribbean sovereign bond market experience is striking.
https://economics.ucdavis.edu/people/amtaylor/files/w18363.pdf