Showing posts with label Zimbabwe. Show all posts
Showing posts with label Zimbabwe. Show all posts

Wednesday, April 06, 2016

War on Cash Zimbabwe Edition

If there should be on template as to what happens with, or the possible ramifications of, the war on cash (also "financial inclusion"), one just need to turn to Zimbabwe’s current dilemma.

Zimbabwe’s economy suffered from the second worst hyperinflation in the world in 2008 with the doubling of prices in about 24 hours. With access to credit shut, the country’s central bank Reserve Bank of Zimbabwe (RBZ) resorted to the financing of the cash strapped government’s boondoggles by destroying her currency (Zimbabwe dollar). The average Zimbabweans were compelled to dump the local currency and use foreign currencies such as US dollar, the euro and or South African rand instead. The Zimbabwean dollar was reduced to non currency uses.

Fast forward today. Once again, Zimbabwe’s central bank (RBZ) has reportedly been at war with cash. But this time with the limited ability to "print" money, the RBZ has resorted to different means: they implicitly accuse those who don't use banks for lack of patriotism and may even have forced banks to limit the public's access of bank ATMs!

From AllAfrica.com (bold mine)
AN exasperated Reserve Bank of Zimbabwe (RBZ) governor John Mangudya has told Zimbabweans that it "a national responsibility for everyone" to use cards when transacting as the country's cash shortages deepened this week. 

Mangudya also hit out at business persons who don't bank their money, opting to keep daily takings at home as a recent order for tobacco farmers to be paid through banks failed to alleviate the liquidity crisis.

The RBZ chief blamed civil service salary and bonus payments for the cash shortages.

But but the opposition People's Democractic Party (PDP) recently insisted that the "cash crisis is because there is no production and real activity in the economy" with the key sectors having effectively "collapsed".

"I ... urge people to use point of sale when transacting," Mangudya was quoted as saying by State media Tuesday.

"It is a national responsibility for everyone; especially at a time we are not in a position to print money. There are local businesspeople that do not bank their daily takings, preferring to keep the money in safes at home, fuelling cash shortages."

Zimbabwe ditched its then virtually worthless local currency in 2009 opting, mainly, for the US dollar and, in the process, denying the RBZ the ability to 'print' - a key monetary policy instrument for boosting the amount of overall money in the banking system.

Local banks were this week reportedly limiting withdrawals and disabling ATMs and the ZimSwitch system.

Mangudya said he was aware depositors were struggling to access their funds.
Zimbabwe’s episode represents just another sign of how governments have become so desperate for them impudently confiscate people’s resources through a variety of means. 

For developed nations, such has been channeled through ZIRP and NIRP and now to the war on cash or the regulation of currency, thus transactions. Eventually, "financial inclusion" will morph into "financial exclusion" as Zimbabweans has exhibited.

Tuesday, April 15, 2014

Ghana to Use Chinese yuan to ease burden of the local currency; other implications

I have recently noted that Ghana has been in the league of nations  that has pumped up money supply growth rate at over 30% in 2011 and or  2012.  (The Philippines may be included in this list where money supply rate has been above 30% for the past 8 months!)

image

The World Bank chart has been unavailable so I show the table instead. The above table reveals why Ghana currency, the cedi, has been in trouble. The Bank of Ghana has been printing money relentlessly since 2009.

Now reports say that the government of Ghana will now liberalize the use of the yuan in order to relieve the stress of the cedi.

From Citifmonline:
Bankers have hailed the imminent trading of the Chinese Yuan as a move that will help ease demand for the US dollar in the country’s forex market.

The value of the cedi, which has plummeted in recent times as a result of the pressure put on traders’ demand for the dollar, will see some recovery when the yuan comes in.

This will mean, businesses and traders dealing in the Sino region will not need to convert to any major currency before transacting business.

Dr. Benjamin Amoah, Head of Financial Stability at the Bank of Ghana (BoG), has said that the central bank has made significant progress in getting the yuan into the country’s currency trading system.

“Work is far advanced in getting the yuan into the system because we have seen that it is needed – and demand always creates supply, so we are trying to make it available and we are working on it; very soon it will start. I don’t want to put a time on it.

“Currently, the demand is for the yuan because a lot of people go to China,” he added.
There are two aspects to cover here. One is the role of money printing in determining the health of the domestic currency and second is the role of the US dollar as international reserve.

Of course the real reason why the demand for the US dollar has been exceedingly strong in Ghana has been due to the frenetic pace of money pumping by the central bank, the Bank of Ghana from 2009-2012, as I noted above.

But since money supply growth has reportedly  declined to 17.7% in 2013, then this should ease some of the cedi woes, with or without liberalization of the yuan. 

However such liberalization will only function as a secondary cause. Considering the competition from the yuan, the Bank of Ghana will now be forced to considerably restrain money printing, otherwise the average Ghanian will gravitate to use the yuan as store of value.

So a recovery in the cedi will come as money printing by the Bank of Ghana eases. But, imbalances brought about by previous money printing will likely surface.

The second aspect in the above story is the role of the US dollar. 

The liberalization of yuan or increased used by the Chinese currency by people in Ghana will deepen the yuan’s role as foreign currency reserve. 

Aside from Ghana, Zimbabwe has reportedly added the Chinese currency as one of the four Asian based legal tender that includes the Australian dollar, the Japanese yen and the Indian rupee (Business Day Live).

The internalization of the yuan can be seen via broadening of dim sum bond floats, numerous swap agreements with various nations, trade in yuan with trading partners as Russia. The yuan is now the eight most traded currency in the world according to the wikipedia.org

This shows why the US feels threatened by China, as the increasing exposure by the yuan in world trade and finance risks diminishing the US dollar’s privilege as the world de facto currency reserve.

Yet brinkmanship foreign policies adapted by US authorities will only accelerate the US dollar’s decline.

Monday, March 30, 2009

Expect A Different Inflationary Environment

``For inflation does not come without cause. It is the result of policy. It is the result of something that is always within the control of government—the supply of money and bank credit. An inflation is initiated or continued in the belief that it will benefit debtors at the expense of creditors, or exporters at the expense of importers, or workers at the expense of employers, or farmers at the expense of city dwellers, or the old at the expense of the young, or this generation at the expense of the next. But what is certain is that everybody cannot get rich at the expense of everybody else. There is no magic in paper money.” -Henry Hazlitt, What You Should Know About Inflation p.135

Ever since the US Federal Reserve announced that it would embark on buying $300 billion of long term US treasury bonds and ante up on its acquisitions of mortgage-based securities by $750 billion, this has generated an electrifying response in the global financial markets.

First, it hastened the decline in the US dollar index, see figure 1.


Figure 1: stockcharts.com: Transmission Impact of the US Fed’s QE via the US dollar

Next, it goosed up both the commodity markets (as represented by the CRB-Reuters benchmark lowest pane) and key global equity markets, as seen in the Dow Jones World index (topmost pane) and the Dow Jones Asia ex-Japan (pane below main window). The seemingly congruous movements seem to be in response to US dollar’s activities.

At the end of the week as the US dollar rallied vigorously, where the same assets reacted in the opposite direction. So it is our supposition that correlation here implies causation: a falling US dollar simply means more surplus dollars in the global financial system relative to its major trading partners.

In other words, since the efficiency of the global financial markets have greatly been impeded by collaborative intensive worldwide government interventions, the main vent of the officially instituted policy measures have been through the currency markets.

And since the US dollar is the world’s de facto currency reserve, the actions of the US dollar are thereby being transmitted into global financial assets. As former US Treasury secretary John B. Connolly memorably remarked in 1971, ``The US dollar is our currency, but your problem!”

Bernanke’s Inflation Guidebook

And as we have long predicted, the US Federal Reserve will be using up its policy arsenal tools to the hilt. And if there is anything likeable from Mr. Bernanke is that his prospective policy directives have been explicitly defined in his November 21 2002 speech Deflation: Making Sure It Doesn’t Happen Here which has served as a potent guidebook for any Central Bank watcher.

For instance, the latest move to prop up the long end of the Treasury market was revealed in 2001 where Bernanke noted that ``a sufficiently determined Fed can peg or cap Treasury bond prices and yields at other than the shortest maturities”, and the shoring up of the mortgage market as ``might next consider attempting to influence directly the yields on privately issued securities”.

Nevertheless even as Mr. Bernanke once said that ``I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar”, he believes in the ultimate antidote against the threat of deflation could be through the transmission effects of the US dollar’s devaluation, ``it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation” where he has showcased the great depression as an example; he said,`` If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.”

Of course, this isn’t merely going to be a central bank operation but one combined with coordinated efforts with the executive department or through the US Treasury, again Mr. Bernanke, ``effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities”.

Although Mr. Bernanke’s main prescription has been a tax cut, he combines this with government spending via purchases of assets, he recommended `` the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.”

And the recent fiscal stimulus, guarantees and other bailout programs which have amassed to some nearly $9.9 trillion [see $9.9 Trillion and Counting, Accelerating the Mises Moment] of US taxpayers exposure plus the recent $1 trillion Private Investment Program or PPIP have all accrued in accordance to Mr. Bernanke’s design.

In all, Mr. Bernanke hasn’t been doing differently from Zimbabwe’s Dr. Gideon Gono except that the US Federal Reserve can deliver the same results via different vehicles.

Inflation is what policymakers have been aspiring for and outsized inflation is what we’re gonna get.

Stages of Inflation

There are many skeptics that remain steadfast to the global deflationary outlook based on either the continued worsening outlook of debt deleveraging in the major financial institutions and or from the premise of excessive supplies or surplus capacities in the economic system.

We agree with the debt deflation premise (but not the global deflationary environment) and pointed to the dim prospects of Geither’s PPIP program [see Why Geither's Toxic Asset Program Won't Float] precisely from the angle of deleveraging and economic recessionary pressures. However, this is exactly why central bankers will continue to massively inflate-to reduce the real value of these outstanding obligations. And this episode has been a colossal tug-of-war between government generated inflation and market based deflation.

It is further a curiosity how the academe world or mainstream analysis has been obsessing over the premise of the normalization of “borrowing and lending” in order to spur inflation. It just depicts how detached “classroom” or “ivory tower” based thinking is relative to the “real” functioning world.

We don’t really need to restore the private sector driven credit process to achieve inflation. As manifested in the recent hyperinflation case of Zimbabwe; all that is needed is for a government to simply endlessly print money and to spend it.

The sheer magnitude of money printing combined with market distortive administrative policies sent Zimbabwe’s inflation figures skyrocketing to vertiginous heights (89.7 SEXTILLION percent or a number backed with 21 zeroes!!!) as massive dislocations and shortages in the economy emerged out of such policy failures.

By the way, as we correctly predicted in Dr. Gideon Gono Yields! Zimbabwe Dump Domestic Currency, since the “Dollarization” or “rand-ization or pula-ization” of Zimbabwe’s economy, prices have begun to deflate (down 3% last January and February)! The BBC reported ``The Zimbabwean dollar has disappeared from the streets since it was dumped as official currency.” The evisceration of the Zimbabwean Dollar translates to equally a declension of power by the Mugabe regime which has resorted to a face saving “unity” government between the opposition represented by current Prime Minister Morgan Tsvangirai of the MDC and President Mugabe's Zanu-PF.

And going back to inflation basics, we might add that a dysfunctional deflation plagued private banking system wouldn’t serve as an effective deterrent to government/s staunchly fixated with conflagrating the inflation flames.

For instance, in the bedrock of the ongoing unwinding debt deleveraging distressed environment, the UK has “surprisingly” reported a resurgence of inflation last February brought about by a “rise” in food prices due to the “decline” in UK’s currency the British pound-which has dropped by some 26% against the US dollar during the past year (Bloomberg). While many astonished analysts deem this to be a “hiccup”, we believe that there will be more dumbfounding of the consensus as inflation figures come by. And we see the same “startling” rise in inflation figures reported in Canada and in South Africa.

What we are going to see isn’t “stag-deflation” but at the onset STAGFLATION, an environment which dominated against the conventional expectations during the 70s.

Why? Because this isn’t simply about demand and supply of goods and services as peddled by the orthodoxy, but about the demand and supply of money relative to the demand and supply of goods and services. Better defined by Professor John Hussman, ``Inflation basically measures the percentage change in the ratio of two “marginal utilities”: the marginal utility of real goods and services divided by the marginal utility (mostly for portfolio and transactions purposes) of government liabilities.”

For instance mainstream analysts tell us that stock prices reflect on economic growth expectations and that during economic recessions, which normally impairs earnings growth, this automatically translates to falling stock prices.

We’ll argue that it depends--on the rate of inflation.


Figure 2: Nowandfutures.com: Weimar Germany: Surging Stock Prices on Massive Recession

This is basically the same argument we’ve made based on Zimbabwe’s experience, in the Weimar hyperinflation of 1921-1923, its massively devaluing currency, which accounted for as the currency’s loss of store of value sent people searching for an alternative safehaven regardless of the economic conditions.

People piled into stocks (right), whose index gained by 9,999,900%, even as unemployment rate soared to nearly 30%! It’s because the German government printed so much money that Germans lost fate in their currency “marks” and sought refuge in stocks. Although, stock market gains were mostly nominal and while the US dollar based was muted (green line).

In other words, money isn’t neutral or that the impact of monetary inflation ranges in many ways to a society, to quote Mr. Ludwig von Mises, ``there is no constant relation between changes in the quantity of money and in prices. Changes in the supply of money affect individual prices and wages in different ways.”

For example, it doesn’t mean just because gold prices hasn’t continually been going up that the inflationary process are being subverted by deflation.

As Henry Hazlitt poignantly lay out the divergent effects of inflation in What You Should Know About Inflation (bold highlight mine) ``Inflation never affects everybody simultaneously and equally. It begins at a specific point, with a specific group. When the government puts more money into circulation, it may do so by paying defense contractors, or by increasing subsidies to farmers or social security benefits to special groups. The incomes of those who receive this money go up first. Those who begin spending the money first buy at the old level of prices. But their additional buying begins to force up prices. Those whose money incomes have not been raised are forced to pay higher prices than before; the purchasing power of their incomes has been reduced. Eventually, through the play of economic forces, their own money-incomes may be increased. But if these incomes are increased either less or later than the average prices of what they buy, they will never fully make up the loss they suffered from the inflation.”

In short, inflation comes in stages.

Let us use the example from the recent boom-bust cycle…


Figure 3: yardeni.com: US Debt as % of GDP

When the US dot.com bust in 2000 prompted the US Federal Reserve to cut interest rates from 6% to 1%, the inflationary pressures had initially been soaked up by its household sector which amassed household debts filliped by a gigantic punt in real estate.

As the speculative momentum fueled by easy money policies accelerated, monetary inflation were ventilated through three ways:

1. An explosion of the moneyness of Wall Street’s credit instruments which directly financed the housing bubble.

Credit Bubble Bulletin’s Doug Noland has the specifics, ``As is so often the case, we can look directly to the Fed’s Z.1 “flow of funds” report for Credit Bubble clarification. Total (non-financial and financial) system Credit expanded $1.735 TN in 2000. As one would expect from aggressive monetary easing, total Credit growth accelerated to $2.016 TN in 2001, then to $2.385 TN in 2002, $2.786 TN in 2003, $3.126 TN in 2004, $3.553 TN in 2005, $4.025 TN in 2006 and finally to $4.395 TN during 2007. Recall that the Greenspan Fed had cut rates to an unprecedented 1.0% by mid-2003 (in the face of double-digit mortgage Credit growth and the rapid expansion of securitizations, hedge funds, and derivatives), where they remained until mid-2004. Fed funds didn’t rise above 2% until December of 2004. Mr. Greenspan refers to Fed “tightening” in 2004, but Credit and financial conditions remained incredibly loose until the 2007 eruption of the Credit crisis.” (bold highlight mine)

2. These deepened the current account deficits, which signified the US debt driven consumption boom.

Again the particulars from Mr. Noland, ``It is worth noting that our Current Account Deficit averaged about $120bn annually during the nineties. By 2003, it had surged more than four-fold to an unprecedented $523bn. Following the path of underlying Credit growth (and attendant home price inflation and consumption!), the Current Account Deficit inflated to $625bn in 2004, $729bn in 2005, $788bn in 2006, and $731bn in 2007.” (bold highlight mine)

3. The subsequent sharp fall in the US dollar reflected on both the transmission of the US inflationary process into the world and the globalization of the credit bubble.

Again Mr. Noland for the details, ``And examining the “Rest of World” (ROW) page from the Z.1 report, we see that ROW expanded U.S. financial asset holdings by $1.400 TN in 2004, $1.076 TN in 2005, $1.831 TN in 2006 and $1.686 TN in 2007. It is worth noting that ROW “net acquisition of financial assets” averaged $370bn during the nineties, or less than a quarter the level from the fateful years 2006 and 2007.

In short, the inflationary process diffused over a specific order of sequence, namely, US real estate, US financial debt markets, US stock markets, global stock markets and real estate, commodities and lastly consumer prices.

Past Reflation Scenarios Won’t Be Revived, A Possible Rush To Commodities

Going into today’s crisis, we can’t expect an exact reprise of the most recent past as the US real estate and the US financial debt markets are likely to be still encumbered by the deleveraging process see figure 4.

Figure 4: SIFMA: Non Agency Mortgage Securities and Asset Backed Securities

Some of the financial instruments such as the Non-Agency Mortgage Backed Securities (left) and Asset Backed Securities (right), which buttressed the real estate bubble have materially shriveled and is unlikely to be resuscitated even by the transfer of liabilities to the government.

Besides, the general economic debt levels remain significantly high relative to the economy’s potential for a payback, especially under the weight of today’s recessionary environment.

Which is to say that today’s inflationary setting will probably evolve to a more short circuited fashion relative to the past.

This leads us to surmise that most of global stock markets (especially EM economies which we expect to rise faster in relative terms) could rise to absorb the collective inflationary actions led by the US Federal Reserve but on a much divergent scale. Currency destruction measures will also possibly support OECD prices but could underperform, as the onus from the tug-of-war will probably remain as a hefty drag in their financial markets.

And this also suggests that commodity prices will also likely rise faster (although not equally in relative terms) than the previous experience which would eventually filter into consumer prices.

In other words, the evolution of the opening up of about 3 billion people into the global markets, a more integrated global economy and the increased sophistication of the financial markets have successfully imbued the inflationary actions by central banks over the past few years. But this isn’t going to be the case this time around-unless economies which have low leverage level (mostly in the EM economies) will manage to sop up much of the slack.

Take for example China. China’s economy has generally a low of leverage which allows it the privilege of taking on more debts.

Figure 5: US Global Investors: China Loans and Fixed Asset Investment Surge

And that’s what it has been doing today in the face of this crisis-China’s national stimulus and monetary easing programs is expected to incur deficits of about 3-7% of its GDP coupled by the QE measures instituted by the US has impelled a recent surge in China’s domestic bank loans and real fixed investments.

Qing Wang of Morgan Stanley thinks that the US monetary policy measures has lowered “the opportunity cost of domestic fixed-asset investment”, which means increasing the attractiveness of Chinese assets.

According to Mr. Wang, ``In practice, lower yields on US government bonds means lower returns on the PBoC’s assets. This should enable the PBoC to lower the cost of its liabilities by: a) lowering the coupon interest rates it pays on the PBoC bills, which is a major liability item on its balance sheet; b) lowering the ratio of required reserves (RRR) on which the PBoC needs to pay interest; or c) lowering the interest rates that the PBoC needs to pay on the deposits of banks’ required reserves and excess reserves, currently at 1.62% and 0.72%, respectively. These potential changes should then lower the opportunity cost of bank lending from the perspective of individual banks.” (bold highlights mine)

In other words, low interest rates in the US can serve as fulcrum to propel a boom in China’s bank lending programs.

This brings us to the next perspective, which assets will likely benefit from such inflationary activities.

Henry Hazlitt gives us again a possible answer ``In answer to those who point out that inflation is primarily caused by an increase in money and credit, it is contended that the increase in commodity prices often occurs before the increase in the money supply. This is true. This is what happened immediately after the outbreak of war in Korea. Strategic raw materials began to go up in price on the fear that they were going to be scarce. Speculators and manufacturers began to buy them to hold for profit or protective inventories. But to do this they had to borrow more money from the banks. The rise in prices was accompanied by an equally marked rise in bank loans and deposits.” (bold highlight mine)

This suggests that expectations for more inflation are likely to trigger rising prices and growing shortages, which will likely be fed by more money printing, and eventually an increase in credit uptake in support these actions.

Some Proof?

China is on a bargain hunting binge for strategic resources, according to the Washington Post March 19th, ``Chinese companies have been on a shopping spree in the past month, snapping up tens of billions of dollars' worth of key assets in Iran, Brazil, Russia, Venezuela, Australia and France in a global fire sale set off by the financial crisis.

``The deals have allowed China to lock up supplies of oil, minerals, metals and other strategic natural resources it needs to continue to fuel its growth. The sheer scope of the agreements marks a shift in global finance, roiling energy markets and feeding worries about the future availability and prices of those commodities in other countries that compete for them, including the United States.”

China has also engaged in a record buying of copper, according to commodityonline.com March 14th, ``China has started to buy copper in a big way again. As part of the country’s strategy to make use of the recessionary trends in the global markets, China has hiked its copper buying during the past few months…

``According to recently released data, China’s copper import hit a record high of 329,300 tonnes in February, up 41.5 per cent from the 232,700 tonnes of January.”

Summary and Conclusion

Overall, these are some important points to ruminate on:

-It is clear that the thrust by the US government seems to be to reduce the real value of its outstanding liabilities by devaluing its currency. Since the US dollar is the world’s de facto currency reserve the path of the US government policy actions will be transmitted via its exchange rate value to the global financial markets and the world’s real economy. And this translates to greater volatility of the US dollar. Moreover, except for the ECB (yet), the QE efforts by most of the major central banks could translate to a race to the bottom in terms of devaluing paper money values.

-Collaborative global policy measures to inflate the world appear to be gaining traction in support of asset prices but at the expense of currency values.

-Global central bankers have been trying to revive inflationary expectations that are effectively “reflexive” in nature. By painting the perception of a ‘recovery’ through a rising tide of the asset markets, officials hope that this might induce a torrent of asset buying from a normalization of the credit process.

-The monumental efforts by global central banks to collectively turbocharge the global asset markets could eventually spillover to consumer prices and “surprise” mainstream analysts over their insistence to “tunnel” over the deflation angle. We expect higher consumer prices to come sooner than later especially if EM economies would be unable to fill the role of raising levels of systemic leveraging.

-Money isn’t neutral which means that the impact of inflation won’t be the same for financial assets and the real economy. Some assets or industries will benefit more than the others.

-We can’t expect the same “reflation” impact of the past episode to happen again as the ongoing tug-of-war between market-based debt deflation and government’s fixation to inflate the system has displaced the gains derived from the previous trends of globalization and the sophistication of financial markets. The US real estate markets will have surpluses to work off and the financial markets that financed the US real estate markets will remain broken for sometime and will take substantial number of years to recover.

-The impact of inflation will come in stages and perhaps accelerate in phases.

-The risk is that inflation could rear its ugly head in terms of greater than expected consumer prices earlier than what the consensus or policymakers expect. And if this is the case then it could pose as management dilemma for policymakers as the real economy remains weak and apparently fragile from the excessive dependence on the government and from the intense distortion brought about by government intervention in the marketplace. To quote Morgan Stanley’s Manoj Pradhan, ``Can QE be rolled back quickly? In theory, yes! Both passive and active QE could be reversed very quickly. The desire to hike rates above their currently low levels complicates matters slightly. Why? The effectiveness of passive QE depends on the willingness of banks to seek returns in the economy rather than simply parking excess reserves with the central bank. Hiking interest rates would reduce these incentives.”

Finally as we previously said it is increasingly becoming a cash unfriendly environment.


Wednesday, February 25, 2009

Zimbabwe's Hyperinflation

Interesting Hyperinflation data...from Economist Steve Hanke of Forbes and Cato.org

According to Mr. Hanke, ``Zimbabwe failed to break Hungary’s 1946 world record for hyperinflation. That said, Zimbabwe did race past Yugoslavia in October 2008. In consequence, Zimbabwe can now lay claim to second place in the world hyperinflation record books."

Highest Monthly Inflation Rates in History

Country

Month with highest inflation rate

Highest monthly inflation rate

Equivalent daily inflation rate

Time required for prices to double

Hungary

July 1946

1.30 x 1016%

195%

15.6 hours

Zimbabwe

Mid-November 2008 (latest measurable)

79,600,000,000%

98.0%

24.7 hours

Yugoslavia

January 1994

313,000,000%

64.6%

1.4 days

Germany

October 1923

29,500%

20.9%

3.7 days

Greece

November 1944

11,300%

17.1%

4.5 days

China

May 1949

4,210%

13.4%

5.6 days


More from Mr. Hanke, ``Zimbabwe is the first country in the 21st century to hyperinflate. In February 2007, Zimbabwe’s inflation rate topped 50% per month, the minimum rate required to qualify as a hyperinflation (50% per month is equal to a 12,875% per year). Since then, inflation has soared."

Well as of November 14th, this was how Zimbabwe's inflation rate fared

Monthly inflation rate=79,600,000,000.00%

Annual Inflation Rate=89,700,000,000,000,000,000,000%

The magic of the printing press.

Friday, January 30, 2009

Dr. Gideon Gono Yields! Zimbabwe Dump Domestic Currency

In the realization of the futility of maintaining transactions based on unlimited issuance of the domestic currency from the printing presses of the Mugabe-Gono regime, the Zimbabwe government has now relented to use alternative currencies as medium of exchange for its economy…

Click on this BBC video link.


According to the BBC (bold highlight mine),

``Zimbabweans will be allowed to conduct business in other currencies, alongside the Zimbabwe dollar, in an effort to stem the country's runaway inflation.

``The announcement was made by acting Finance Minister Patrick Chinamasa…

``BBC southern Africa correspondent Peter Biles says the Zimbabwean dollar has become a laughing stock. A Z$100 trillion note was recently introduced…

``Before the announcement, shops in Zimbabwe were increasingly demanding payment in US dollars - a reality acknowledged by Mr Chinamasa.

``"In the hyper-inflationary environment characterising the economy, our people are now using multiple currencies alongside the Zimbabwean dollar. These include the [South African] rand, US dollar, Botswana pula, euro and British pound among others."

``A Harare resident said even street vendors were refusing to accept Zimbabwean notes.

``Last year, the Central Bank was forced to slash 10 zeros from the local unit in an effort to make the currency more manageable.

In effect, Zimbabwe had been forced by the marketplace (and the economy) to junk its currency regime.

This demonstrates how markets are more powerful than governments. While the latter can manipulate the marketplace up to a certain extent, ultimately unsustainable trends will compel for a market based response or adjustment. Thus Zimbabwe's hyperinflation will be followed by deflation (different from debt deflation).

(HT: Charleston Voice)

Wednesday, January 28, 2009

Zimbabwe’s Dr Gideon Gono: To Ensure My People Survive, I Had To Find Myself Printing Money.

To all of you who are Dr Gideon Gono fans out there, here are some of his notable commentaries based on a Newsweek interview:

Dr. Gono: I've been condemned by traditional economists who said that printing money is responsible for inflation. Out of the necessity to exist, to ensure my people survive, I had to find myself printing money. I found myself doing extraordinary things that aren't in the textbooks. Then the IMF asked the U.S. to please print money. I began to see the whole world now in a mode of practicing what they have been saying I should not. I decided that God had been on my side and had come to vindicate me.

My comment: Political survival of the Mugabe regime drives Dr. Gono’s policies. Moreover, as Dr. Gono implies, you don’t need the borrowing and lending gobbledygook to debase a currency. 

And this is a lesson that applies even to developed economies faced with the present crisis. While they speak of doing these for the 'good of the people' or restore economic growth, the crux of the matter is that they are wantonly debasing their currencies to reduce real debt levels at the expense of the general public. Unfortunately mainstream economists, most especially the popular genre, don't seem to get it. Policies based on political survival don't match with the interests of the public. 

Dr. Gono: The stockbrokers were creating a money supply that wasn't there. I printed Z$1.5 quadrillion, but the exchange was operating with Z$100 sextillion. So I said, "Who is doing my job?" Unless there is more discipline and honor, the exchange will stay closed. I can't be bothered. I don't know when it'll open. It's a free market, a business which must be allowed to succeed or fail.

My comment: Dr. Gono hates competition and that’s why Zimbabwe stock exchange was closed. He hates it when people shun their currency to look for a substitute 'store of value'. 

Another probable reason could be due to the industry's desire to conduct transactions in foreign currency which obviously will compete and undermine his authority. Where Dr. Gono's power to wield control of his constituents emanates through its currency, a society's shift to an alternative medium of exchange effectively attenuates the vitality of the tyranical Mugabe-Gono regime.

Dr. Gono: It's a mystery to many how I have survived. I am modestly credited with the survival strategy of my country. The issue is if you want to break Zimbabwe and want it to fall, just deal with one man. You deal with Gideon Gono.

My comment: Another example of Fatal Conceit.

Dr. Gono: It's impossible to be directing the course of an entire economy and divorce yourself from politics. Politics are important because the turnaround of the economy hinges on political stability, but I can't tell when that will happen.

My comment: This is an example of an oxymoronic or “seemingly self-contradictory effect” statement. Political stability can't be attained because he and Mr. Mugabe are the cause of the miseries of Zimbabwe.

Wednesday, January 21, 2009

Low Hyperinflation Risk For the US?

According to some analysts, the risk of a Zimbabwe like hyperinflation to happen to the US dollar is slim if not implausible. Because the idea is, once 'inflation' gains a footing and eventually overcomes 'deflation' it will be easier to control.

Perhaps. But such is giving too much credit to the ability of authorities to steer us out of trouble.

But before acceding to such premises, it is best that we must try to understand Zimbabwe’s hyperinflation model.

We quoted Albert Makochekanwa of the Department of Economics of the University of Pretoria, South Africa in our Will Debt Deflation Lead To A Deflationary Environment?, who wrote in his paper “Zimbabwe’s Hyperinflation Money Demand Model” the following: ``Borrowing from Keynes (1920) suggestions, namely that ‘even the weakest government can enforce inflation when it can enforce nothing else’; evidence indicates that Zimbabwean government has been good at using the money machine print. Coorey et al (2007:8) point out that ‘Accelerating inflation in Zimbabwe has been fueled by high rates of money growth reflecting rising fiscal and quasi-fiscal deficits’. As a result of that, the very high inflationary trend that the country has been experiencing in the recent years is a direct result of, among other factors, massive money printing to finance government expenditures and government deficits.”

So, exploding DEFICITS…

Plus a jump in government payrolls which has surpassed the private sector, which further entrenches government spending...

Source: contraryinvestor.com (Fabius Maximus)

Plus, a soaring growth money supply, which according to Jeff Tucker of Mises.org seems starting to respond…And importantly a snowballing clamor for the printing press:

Previously we posted Ken Rogoff see Kenneth Rogoff: Inflate Our Debts Away!

And now:

From Peter Boone and Simon Johnson (Wall Street Journal Blog)…

``The Fed should announce that it will create inflation in 2009, i.e., it will do whatever it takes to make sure that wages and prices rise, rather than fall, in the next 12 months. And it should back that up with more aggressive monetary expansion, buying even more government and private securities. We cannot wait for a deflationary death spiral to take hold

From the Economic Times

``There is not much government can do to accelerate the real rate of growth. The remaining option is to tolerate, even encourage, a faster rate of inflation to improve debt-service capacity. Even more than debt nationalization, inflation is the ultimate way to spread the costs of debt workout across the widest possible section of the population.

And at ZERO interest rates, ``we are entering a world with interest rates that are far too high for the economy's good," Goldman Chief U.S. Economist Jan Hatzius wrote in a Jan. 16 research note.” (Businessweek)

``The solution is obvious: The Fed needs to deliberately raise the rate of inflation—maybe not all the way to 6%, but significantly above zero. One way to do that is to print lots of money. The Fed can create money from thin air by purchasing assets such as Treasuries and mortgage-backed securities and paying for them by crediting the seller with newly created reserves at the central bank.” writes Peter Coy of Businessweek

Essentially Dr. Gideon Gono of Zimbabwe seems to be gaining quite a following among personalities in Wall Street, the academe and in the media...Aside from of course, public authorities like Mervyn King Governor of the Bank of England who will likewise do a Gono.

As for the risk of hyperinflation in the US or elsewhere, I’d rather be guided by Ludwig Von Mises in Human Action p. 427….

``But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.”

``It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.



Tuesday, December 02, 2008

Zimbabwe’s Gono Lauds US and UK For "Seeing the Light" and "Making Positive Difference"

We frequently cite Zimbabwe because it has been a living example and the epitome of how government policies can, out of political motivations, deliberately cause the destruction of a nation’s currency and its aftereffects to its markets and economy.

Bizarrely, just last April, Dr. G. Gono, Governor of the Reserve Bank of Zimbabwe, or Zimbabwe’s central bank lauded the US and UK in his Zimbabwe’s Monetary Policy Statement (HT: FT Alphaville) for following his footstep.

Quoting Dr. G. Gono (all bold highlights his)

``As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests.

``That is precisely the path that we began over 4 years ago in pursuit of our own national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification and demonization we have endured from across the political divide.

``Yet there are telling examples of the path we have taken from key economies around the world. For instance, when the USA economy was recently confronted by the devastating effects of Hurricanes Katrina and Rita, as well as the Iraq war, their Central Bank stepped in and injected life-boat schemes in the form of billions of dollars that were printed and pumped into the American economy.

``A few months ago, the USA economy confronted a severe mortgage crisis, which threatened to spark an economy-wide recession. The USA Central Bank again responded by injecting over US$160 billion between December, 2007 and March, 2008, to provide impetus to the American economy and prevent a worse crisis from happening.

``A look at the recent developments in the UK equally reveals how increasingly, leading central banks in the global economy are bailing out troubled economic sectors to achieve macroeconomic and financial stability.

``Faced with a yawning threat of systemic bank failures on the back of the aftermaths of that country’s mortgage crisis, the Bank of England was directed by its Government to intervene by providing a £50 billion lifeline to the UK’s banking sector.

``Here in Zimbabwe we had our near-bank failures a few years ago and we responded by providing the affected Banks with the Troubled Bank Fund (TBF) for which we were heavily criticized even by some multi-lateral institutions who today are silent when the Central Banks of UK and USA are going the same way and doing the same thing under very similar circumstances thereby continuing the unfortunate hypocrisy [italics-mine] that what’s good for goose is not good for the gander.

``Those who yesterday did not see the interconnection between sanctions and the politics of this country as they sought conventional and dogmatic textbook methods of moving this economy now have good cause to reflect on these examples of quasi-fiscal interventions by the central banks in the USA and the UK and review their dogmas in the interest of adopting more flexible and dynamic approaches [italics mine] informed by the exigencies of the economic situation on the ground.

``Our economy is and has been in trouble for over ten years and our extraordinary interventions by whatever name have helped to keep the wheels of this economy moving.

``Even though our efforts have been criticized and derided clearly for undisguised political reasons, we are proud that we had the courage to do something that made a positive difference when it would have been far too easy for us to appear reasonable by doing nothing and thereby make the situation worse.

``As Monetary Authorities, we commend those of our peers, the world over, who have now seen the light on the need for the adoption of flexible and practical interventions and support to key sectors of the economy when faced with unusual circumstances.

``Of course, in the short-term such interventions are without doubt inflationary but in the medium to long-term they trigger and propel economic growth and development that everyone craves for.”

Our comment:

Well, Dr. Gono should be exceptionally pleased to know that his peers have since been gradually and methodically assimilating his paradigm, albeit in a developed economy version and as showcase of the manifold tools available to the modern banking system.

Where Dr. Gono gloats, ``we are proud that we had the courage to do something that made a positive difference when it would have been far too easy for us to appear reasonable by doing nothing and thereby make the situation worse.”

Making a positive difference?

We refer to this top-10 “worst list” article where Zimbabwe is ranked the worst currency of the world.

Why?

Because $1 USD = 642,371,437,695,221,000 Zimbabwean Dollars!

According to top10-list.com, ``It's hard to keep track of just how fast the Zimbabwean dollar has fallen since the government reinstated electronic parallel market transfers on Nov. 13, but even before that the currency of Zimbabwe was the most worthless in the world.

``While the official rate on Monday was 19,393.94 Zimbabwean dollars to the $1 USD, the old mutual implied rate, generated from comparing the Zimbabwe and London stock exchanges, valued the currency at more than 642 quadrillion to one.

``When the currency was revalued this summer, an egg cost about $35 billion Zimbabwean dollars.”

Zimbabwe’s currency is losing value almost every minute, and that’s the positive and speediest difference!

Well for the list of the other worst currencies…

2nd worst currency $1 USD = 35,000 Shillings

3rd worst: Turkmenistan $1 USD = 24,000 Manat

4th worst, Vietnam $1 UDS = 16,975.00 Dong

5th Sao Tome and Principe $1 USD = 14,350 Dobra

6th Indonesia $1 USD = 11,198.40 Rupiah

7th Iranian Rial $1 USD = 10,179 Rial

8th Laos $1 USD = 8,640.75 Kip

9th Guinea Franc $1 USD = 5,115.00

10th Paraguay $1 USD = 4,615.00 Guarani

Read the details here