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Behind Zim hyperinflation

When Money Destroys Nations: How Hyperinflation Ruined Zimbabwe, How Ordinary People Survived, & the Warnings for a World that is Printing Money, by Philip Haslam with Russell Lamberti

ON NOVEMBER 25 2008, the United States Federal Reserve announced that it would begin a quantitative easing policy by buying up to $600bn in debt and mortgage-backed securities tied to Fannie Mae and Freddie Mac. On September 16 2014, the New York Times reported that the first phase of the Federal Reserve's retreat from its economic stimulus campaign was nearly complete.

The United States of America started printing an unimaginable amount of money, $1.7trn, in the attempt to solve one problem while potentially beginning another. The European Central Bank did much the same, and both have continued to print money, as has Japan.

The author opens his book with a pertinent question: “With the vast money printing programmes in developed countries today, could any of them ever become like Zimbabwe?”

This book is an unusually accessible account of an economic phenomenon that is commonly assumed to be arcane: hyperinflation. The consequences are very real and felt by everyone who has any connection to a country that has suffered this fate, but its genesis is less well understood.

What the author successfully achieves is an explanation of both the cause and the awful consequences. While Zimbabwe’s current per capita gross domestic product is ranked 227th in the world, the country is significant with its population of about 13 million.

The book describes what happens when the government of a once-prosperous country makes bad decisions.

No two countries are ever the same, and no two economies are ever the same. However, there are parallels described by Haslam that provide a cautionary tale for all.

Astounding corruption fuels the fire

Haslan describes how a country moves from acceptable inflation to hyperinflation in three stages. It starts with increasing debt to unaffordable levels for reasons that have to do with politics rather than economics. Often, as in the case of Zimbabwe, astounding corruption only fuels this trend.  

In the case of Robert Mugabe, war veterans were made unsustainable promises that included pensions double the rate of civil servants’ salaries. Added to this was the enormous cost of getting involved in the war in the Democratic Republic of Congo.

Zimbabwe, once a creditworthy country, was clearly out of control. Like any creditor with a recalcitrant debtor, the World Bank withdrew its support and Zimbabwe was unable to repay its debt.

The second stage of hyperinflation involves a financial panic. In Zimbabwe’s case, this resulted in the Zimbabwean dollar losing 75% of its value. To heighten the reality of this, imagine an importer in that situation with all imported products now unaffordable and the prohibitive cost increases to consumers. Then multiply this across the country.

With defeat palpable and people rioting for food, the government chose to solve one problem while beginning another. They printed money. This led to limiting bank withdrawals, seizing property from funds to land, and the total destruction of a once-glorious economy.  

Annual inflation figures rose from 20% per annum in 1997 to 897 000 000 000 000 000 000 00% by mid-2008!

Deja vu: Germany in 1920

Hyperinflation is not a new tragedy; Wikipedia cites 39 examples. Germany is a well-known example and suffered the same fate in 1920 for similar reasons – unfunded liabilities, followed by financial panic, followed by hyperinflation.

In Zimbabwe, as in all the other economies, the hyperinflation caused by money printing is not an “economic” issue, it is a human tragedy. It destroys the lives of citizens who have their life savings eroded, it hurts everyone as they all struggle to buy food, it changes the fabric of life as people seek simply to survive.  

Each chapter ends with a question making the book very pertinent. Here are a few: how much debt is your own government in? Can it repay this debt without printing money? Are there similarities between your country’s economy and Zimbabwe’s prior to its currency collapse? Do you have community to rely on in times of crisis?

The account is intimate and tragic. It engenders a new respect for the survivors of this tragedy.
   
Readability:     Light --+-- Serious
Insights:        High --+-- Low
Practical:        High ---+- Low

- Fin24

*Ian Mann of Gateways consults internationally on leadership and strategy and is the author of Strategy that Works. Views expressed are his own.

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