Zimbabwe In The Aftermath Of Hyperinflation: Free Markets

We have published so much about the negative aspects of Zimbabwe, such that we even made her as model for government abuses.

The quest for the preservation of political power by President Robert Mugabe eventually led to hyperinflation.

But things do change.

It would be understandable that after enduring the worst, there is no way but up.

But it is Zimbabwe's reform transition that makes it all the while striking-from tyranny to free market.

This article from Alf Field "Zimbabwe's Fresh Start" is a must read... (Thanks to Jeff Tucker of the Mises Blog)

(bold highlights mine)

``In February 2009 Zimbabwe was the only country in the world without debt. Nobody owed anyone anything. Following the abandonment of the Zimbabwe Dollar as the local currency all local debt was wiped out and the country started with a clean slate.

``It is now a country without a functioning Central Bank and without a local currency that can be produced at will at the behest of politicians. Since February 2009 there has been no lender of last resort in Zimbabwe, causing banks to be ultra cautious in their lending policies. The US Dollar is the de facto currency in use although the Euro, GB Pound and South African Rand are accepted in local transactions.

``Price controls and foreign exchange regulations have been abandoned. Zimbabwe literally joined the real world at the stroke of a pen. Money now flows in and out of the country without restriction. Super market shelves, bare in January, are now bursting with products."

Read the rest here.

Some additional important quotes:

Here are the common sins (not only in Zimbabwe but everywhere- the difference is that Zimbabwe went to the extremes) and their consequences...

``There are common denominators in all hyperinflations. Generally government finances reach a point where large budget deficits cannot be financed by taxes or borrowings. The choices come down to austerity (with the government cutting back its spending) or by funding the deficit by creating local currency through the printing press, leading to the inflation tax. This is always a political decision, but the line of least resistance is the printing press. Cutting government expenditures and laying off bureaucratic staff is anathema to most politicians.

``The worst trauma for ordinary people during the hyperinflation was lack of food. This was due mainly to the imposition of price controls. If the cost of production of an item was $10 and the price controllers instructed that the item could only be sold for $5, the business would soon go bankrupt if they sold at the controlled price. The result was that production and imports just dried up, hence the empty shelves in the supermarkets. People survived by shopping in neighboring countries and relied on assistance from South Africa and the aid agencies.

``Companies survived the hyperinflation with great difficulty and often by ignoring laws. Although companies were left without debt post February 2009, they were also left deficient in working capital and had dilapidated plant and equipment. Regular repairs and maintenance could not be afforded. Most companies now require urgent recapitalization.

``The causes were those always present in these events. A weak economy, large government budget deficits, inability to borrow funds combined with the political decision not to cut Government spending. Governments are reluctant to lay off government employees, especially those related to the armed forces. The latter might invite a military coup. The only source of funding left is the creation of new money.

As to how one hedges against hyperinflation from the Zimbabwe nightmare...

``Having seen the impact of hyperinflation at close quarters, my view is that this is the least desirable method for eliminating excessive debt. The population has been traumatized physically (starvation), mentally and financially. Most people did not have foreign assets or local tangible assets, so lost virtually everything. The companies survived using unusual skills, ignoring laws and protecting working capital by holding foreign currency or purchasing equities"

Foreign currencies, equities, unusual "survival" skills and IGNORING LAWS...

Final quote...

``It is fascinating to see how rapidly the economy is recovering. It is a great testament to what can be achieved in a free enterprise environment by the elimination of controls combined with the institution of new money that people trust. It needs to be money that their Government cannot create via the printing (or electronic) press."

Amen