Hi
I was reading about the Zimbabwean dollar and came across many explanations for hyperinflation and the Zimbabwean’s dollar’s collapse.
Which ones make the most sense? Is this the best explanation?
“The combination of decreases in farm production following large land redistributions, a decline in the production of goods, a collapse of the banking system, involvement in the Second Congo War in 1998, and a drought in 1999, led to a steady decline in production. Zimbabwe suspended foreign debt repayments in February 2004, resulting in compulsory suspension from the IMF. This combined with sanctions imposed by the United States, the IMF and the European Union led to large budget deficits which could only be covered by printing money, eventually leading to hyperinflation.”
It comes down to “whatever leads to a collapse in confidence that the currency will hold its value (within general tolerable variations)”. What causes that collapse in confidence will vary between circumstances; but overt defaulting on debts is a pretty significant trigger.
Certainly an overt decision by government to begin printing significant volumes of banknotes will drive hyperinflation. And more so in an economy that operates mostly on banknotes rather than on checks, credit, and other forms of money in trade.
In most cases governments really firing up the printing presses is a response to high inflation gathering speed, but maybe not yet full-fledged hyper inflation. So it’s not (usually) the primary cause that first gets the ball rolling.
But printing banknotes is a response that, like pouring gasoline on a growing fire, pretty well guarantees the economy will go over the edge into production freefall and also currency value freefall.
The simple explanation is printing money too fast. If food prices go up, because there is not enough food. Exchange rates go up, because almost nobody wants $Z outside the country - so import prices go up (and almost anything except food is an import)… Then, what happens if suddenly anyone dealing with the government - civil servants, party cronies, government contractors, etc - suddenly have enough money to pay those higher prices? Well, of course, they end up bidding prices higher. Not exactly bidding, but sellers realize “these guys have a wallet full of bills, could afford double the price, so why should I only charge X for my bread?”
Unless the person (head of national bank, president, whoever) recognizes the signs and stops printing money, this is a vicious feedback cycle. However, to slam on the brakes means the civil servants and the people supplying caviar to the presidential palace no longer get paid. The government either pays their bills from taxes, prints money, or stops spending. For a quasi-literate dictator with unlimited power, which choice is easiest?
So all the causes listed contributed. They made life (food) expensive, reduced taxes, made imports more expensive. Government messes and arbitrary action helped destroy what little industry there was, or drove out the whites who by their racist-induced superior position, knew how to operate the industries. Plus, under the guise of land redistribution, Mugabe’s party cronies drove white farmers off the land and gave it to their cronies, instead of people who would actually farm it. The farm equipment for lack of maintenance and knowledge, fell into disrepair.
Zimbabwe had hyperinflation because they printed a shitload of money. That’s the direct cause.
They printed a shitload of money because they had massive budget deficits and wanted some easy way to finance those deficits. Printing money was their easy way. They had massive budget deficits for many different reasons, each one of which made an already bad situation worse. The decline in farm production meant less production for the government to tax, which meant a higher deficit. The Second Congo War meant military spending, which meant a higher deficit. The drought meant less much less production, which meant less to tax, which meant a higher deficit. Etc. Every bit of bad policy and environmental disaster put more pressure on government finances, and all of that pressure combined led to massive deficits, and those massive deficits led Zimbabwe to print money to pay its bills.
More important? Everything is important. When you keep adding straw to a camel’s back, each individual straw doesn’t weigh much. It’s the combined weight that causes the disaster.
Inflation can have a lot of causes. But hyperinflation is pretty much always a government decision. It occurs when a government decides to try to print money faster than it can lose its value.
It should be noted that just printing money will not cause hyperinflation in all economies, just those that mainly use banknotes as a medium of exchange. The developed world, for example, uses mainly credit/debit cards as a medium, and printing more banknotes will not result in hyperinflation. Any extra bills printed will just fill up the central bank’s vaults and sit there unused.
I’m not saying the developed world is immune to hyperinflation, but it would have to be caused another way.
I find this questionable. There’s the principle of bad money driving out good money. If you dump banknotes into the economy, it’s going to drive prices up. Credit card debt is paid off in those banknotes so it will follow the pattern.
Developed countries don’t act like this, that much is true. But if they did act like this, the money wouldn’t stay in banks. There’s a one-to-one fixed “exchange rate” between banknotes in circulation and “credits” on central bank computers. The credits can be exchanged for banknotes, and the banknotes exchanged for credits, at will. Even more important: a dollar buys a dollar’s worth of stuff at the store, regardless of whether a banknote or a debit card is used. They are both equivalent to one unit of currency.
If developed countries financed major deficits with tons and tons of newly created money, then prices would skyrocket – regardless of the method of money creation that was used.
Injecting money into the economy is the best thing to do when you’re facing down, I don’t know, 0% interest rates and the possibility of a deflationary spiral.
Dumping it out of helicopters isn’t efficient, but funding public works projects has much the same effect in terms of getting money out into the world.
It doesn’t matter where the money comes from or whether it’s printed or electronic. The method is the same. When merchants discover their customers have plenty of money - cash or credit - they raise prices, stop discounting, etc. Prices go up. So everyone in the economy is forced to raise their prices, and/or demand higher wages to pay for the extended cost of living. If more money enters the system than economic growth can account for, you get inflation.
Credit cards are borrowing from the future to pay for the present (as are bank loans). If people believe that- including interest - the future money will be more plentiful, they will spend more today. Same effect, except then if income growth does not happen, money is more scarce tomorrow and prices stop going up.
The main issue with credit rather than currency bills is that as governments begin to realize that money itself is becoming a problem, they play games with the banks and ATM’s. During the recent Greek crisis, as with many similar crises, ATM withdrawal limits were imposed. In other countries with similar problems. currency exchange controls are imposed, to stop people from dumping their currency for US dollars or Euros at a discount. So is it any wonder during difficult times, people prefer to have something tangible in their hands that cant be restricted or limited? (But read about how India last winter suddenly declared all big bills obsolete, must be exchanged through the banks so they could track hidden cash; fortunately this had little impact on prices, up or down. North Korea did something similar a decade or so ago to screw over black marketeers.)
For Chinese levels of “interesting”. Include me out of this.
Huh? When is the last time you took actual banknotes to your bank to pay off your credit card? I’m struggling to think of any time I did this and I’ve had a credit card for 30+ years. These days, I just go to the credit union’s online site and transfer the money. Before they had a site, I either went to the teller and told her to transfer the funds or wrote them a check.
I agree, but I’m not sure how it would actually work in today’s world. The thing is, banknotes only constitute a small fraction of the money in circulation.
The India currency last December was an instructive lesson. A lot of commerce took a hit because there was a shortage of banknotes. (Our first few days in Amritsar and Delhi included trying a dozen bank machines before finding ones with actual cash to dispense). Fortunately India has a moderately robust electronic payment economy for some sectors, so our trip did not suffer. The more middle class types that don’t deal in cash businesses use the same electronic banking and payments as the West. I saw a news item about some hippie-type Dutch tourists who were busking for money (begging, in India) because the money they came with - bills - was suddenly worthless. (As opposed to China, where our guide in Lhasa paid the tourist company’s bill at our hotel by peeling off money from a huge wad of 100Y’s)
But you also see similar issues when there’s a form of disaster. Credit card payment systems are down, people want to pay cash, but they can’t get money from bank machines… the biggest advantage of cash is that - unless the country is playing currency games - it’s always worth something. The downside is, if everyone wants it at once, there is nowhere near enough.
But before 2008, physical currency outside bank vaults used to be the vast majority of government money: the monetary base. The majority of base money was physical money circulating out in the world. Banks only kept the fraction needed for legal reserve requirements.
If the US or another developed country starts hyperinflating, then there is going to be a major cost for holding all kinds of money, including base money. The value of it will disappear week by week, and if the hyperinflation is strong enough, even day by day. There are stories of hyperinflation-afflicted people suffering nightmares about having forgotten a bundle of cash in a drawer, and losing their savings day by day. The velocity of money sharply spikes in this situation: the money has to move. There is no point in holding it, after all. (This spike in velocity is further inflationary, more fuel on the fire.) In that situation, banks won’t bother holding the reserves of government cash that they do now. They’ll want to get rid of it to avoid the inflation tax. Of course we’d need to see it happen in reality in a developed country to be absolutely certain – and we can all hope that won’t ever happen – but I think it’s likely that demand for physical currency would sharply increase, and physical currency would again be the majority of the monetary base. If given the option, people would take the physical cash and banks would demand that cash at parity from their electronic reserves. The money would be printed.
Only way I see to stop that is if the US government just decided to stop offering physical cash at parity in exchange for electronic reserves. They could also hypothetically impose daily transaction limits on electronic payments. But that would just compound economic disasters on top of each other. And ultimately, it wouldn’t stop the inflation.
What I can’t understand is Germany’s hyperinflation. At least three different times the government put it’s foot down and said “from now on 100,000 old marks are equal to 1 new mark.” It didn’t work until the fourth time, why?
When is the last time you experienced hyperinflation? I haven’t in my lifetime. But if I did, of course I would be paying my credit card debt with banknotes. Hell, while I was at the bank I’d pay off my mortgage, my car loan, and my student loans by just handing the teller a hundred thousand dollar bill. Then I’d go next door to Taco Bell and I’d spend another hundred thousand dollar bill on a burrito.