Zimbabwe has officially retired the Zimbabwe dollar as of last Saturday, concluding a disastrous monetary experiment that devastated the nation and forced its wealth to flee abroad. The remnants of this turmoil will take generations to mend.
In the late 1990s, the Zimbabwean government seized private farms from white landowners, claiming to address the ‘injustices of colonialism.’ However, the actual impact of these actions remains questionable.
The result was the replacement of seasoned farmers with those lacking experience, leading to a stunning 45 percent decline in food production. This downturn caused the banking sector to implode, leaving farmers unable to secure loans needed to sustain their struggling farms.
By 2007, unemployment had soared to an alarming 80 percent, prompting the central bank to resort to printing massive amounts of currency. Zimbabwe’s President, Robert Mugabe, then mismanaged these funds in futile attempts to improve conditions.
As anticipated, this strategy of rampant money creation led to widespread economic despair. The currency hyperinflated, worsening poverty and food scarcity instead of alleviating them. By November 2008, inflation had reached the staggering rate of 79.6 billion percent.
Exceptional Incompetence
While the citizens of Zimbabwe became quadrillionaires on paper, the harsh reality was one of poverty. Civil unrest, government instability, and a growing distrust in fiscal management plagued the population.
In practice, the Zimbabwe dollar was supplanted by the U.S. dollar and other foreign currencies by 2009. However, the official demonetization of the Zimbabwe dollar occurred just recently, concluding at an exchange rate of 35 quadrillion to one against the U.S. dollar.
Such an outcome required egregious mismanagement and bold decisions. Simply doing nothing would have spared the nation much of its suffering.
“It takes truly exceptional incompetence to create hyperinflation,” remarked Edward Hadas of Reuters. “To achieve this, Mugabe and his central bankers had to mismanage government finances, economic policies, and international relations. They persisted in the face of their evident failures, unimpeded by any substantial political opposition.
“In most parts of the world today, deflation is a more pressing concern than inflation—let alone hyperinflation. Most central bankers worry about insufficient power to influence prices, rather than excessive control. While governments can create hyperinflation through reckless deficit spending, it typically requires a level of excess beyond what a reasonably functioning political structure would allow.”
Going Boldly from Decent to Indecent
The grim lessons from Zimbabwe’s hyperinflation and Hadas’s observations provide essential insights. Certainly, the trajectory toward hyperinflation requires continuous deficit spending and governmental ineptitude. As Hadas suggests, a well-functioning political system should inherently prevent such extreme situations.
Nevertheless, during crises, political systems often shift from decent to indecent. In these critical moments, officials may abandon sound practices, engaging in extreme deficit spending, inflating the currency, and even property confiscation.
“The country is…standing on the edge of a cliff which threatens to irreversibly take us downhill if we do not boldly move forward with speed to address most of our shortcomings,” stated Zimbabwe Reserve Bank Governor Gideon Gono, even as the price of a can of Diet Coke soared to 56 million Zimbabwe dollars.
Bold actions by central bankers frequently lead to catastrophic currency devaluation. This is a vital consideration as we move forward. When markets falter and banks face challenges, Federal Reserve Chair Janet Yellen will come under pressure to “do something.” However, such actions could prove far more detrimental than inaction, particularly if it involves radical currency debasement.
The Federal Reserve is engaged in the most extensive monetary experiment in history. In the coming days, we may learn when the Fed will begin to retract the extensive credit it has been providing for over six years. Nonetheless, it is prudent not to take Yellen’s words too seriously; when the next crisis emerges, she will likely prioritize maintaining the existing political framework above all else.
While it’s unlikely we will experience a situation as dire as Zimbabwe, we may still find ourselves in a less favorable scenario than what we currently know.
Sincerely,
MN Gordon
for Economic Prism
Return from Going Boldly from Decent to Indecent to Economic Prism
