Hyperinflation and Zimbabwe

Do You Have Change for a Trillion?

Hyperinflation and Zimbabwe
August 7, 2015

"Hey buddy, can you spare a few trillion until Thursday?"

No, that's not a quote from the discussions on the Greek debt crisis, but it might have been a quote from a street conversation in Zimbabwe, where hyperinflation forced the government to print a one hundred trillion dollar note.

Hyperinflation takes place when an inflationary cycle spirals out of control. When a country prints more money to increase the money supply but there is limited growth to accommodate all of the new money in the system, the currency loses its value due to oversupply and limited demand. Prices for goods and services effectively increase because of the devalued currency.

Some governments attempt to print their way out of the system with more money as stimulus, further aggravating the problem. Once the confidence in the currency is lost, it typically takes some form of economic reset to restore order.

Hyperinflation can also come about as the aftermath of wars when confidence in a currency can be lost, or in the breakup or creation of new countries where the money supply does not match the demand and/or confidence level.

In Zimbabwe's case, hyperinflation was more a product of GDP collapse than monetary policy. President Robert Mugabe established "land reform" and effectively seized farmland owned by white farmers, handing it over to black Zimbabweans as a form of reparations. Unfortunately, the new landowners knew nothing about farming, and the agricultural-based economy collapsed as a result. Unemployment skyrocketed to a reported 94% and hyperinflation followed. [NOTE: Facts found in this article are correct by the majority of accounts, but due to the state of the Zimbabwean economy and government records, figures are impossible to verify.]

The inflation rate reached 3.5 million percent per month in 2008, causing prices to nearly double per day. Effectively, the Zimbabwean economy became a multi-currency system in 2009, with the South African rand and the U.S. dollar replacing all use of Zimbabwean notes except as a curiosity. In 2014, four more currencies gained Zimbabwean acceptance — the Australian dollar, Chinese yuan, Indian rupee, and Japanese yen.

In June, Zimbabwe finally threw in the towel on their own currency and officially began retiring the Zimbabwean notes in favor of U.S. dollars. Through September 30th, people can exchange their Zimbabwean dollars at the exchange rate of 35 quadrillion Zimbabwean dollars to $1 U.S. For anyone having difficulty comprehending the amount, that is 35 followed by fifteen zeroes.

Accounts denominated in Zimbabwean dollars up to 175 quadrillion dollars that were held before March 2009 will receive a flat $5. Accounts beyond that mark receive the same rate of 35 quadrillion to $1 for the balance of the account. Physical banknotes can be redeemed at a higher rate of $1 for every $250 trillion in Zimbabwean notes, meaning that every one of those 100 trillion dollar bank notes is worth all of forty cents.

The Reserve Bank of Zimbabwe has set aside $20 million U.S. to complete the conversion process, known as demonetization. Reserve Bank Chief John Mangudya was quoted as saying that Zimbabwe needed to "safeguard the integrity of the multiple currency system," adding that "demonetization is, therefore, critical for policy consistency and for enhancing consumer and business confidence." In other words, if the country is going to maintain the use of multiple currencies on a large scale, it needs to pick one to be the standard.

Some savvy Zimbabweans have made significantly more money selling their banknotes online as souvenirs, with their novelty value being far greater than their actual value. That is the kind of entrepreneurial thinking that could eventually revive the Zimbabwean economy, if anybody had the sense to put them in charge.

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