Preamble: this is a follow-on post from Zimbabwe Hyperinflation 2.0: The US Dollar Version. I’ve had quite a few questions come back from that post. So I thought that I would give a roadmap of how this is likely to play out, given Zimbabwe’s history, and the history of hyperinflation through the world.
John Maynard Keynes wrote:
“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.”
~ John Maynard Keynes, The Economic Consequences of the Peace
In its classic form, hyperinflation is the great destroyer of the middle class. The poor, who always struggle, now struggle more than they did before. The rich holders of capital remain rich by keeping their wealth in stocks, property and commodities. But the middle classes, reliant on their salaries and pensions, are robbed of their purchasing power and reduced to subsistence.
It’s what happened in Zimbabwe in the 2000s. It’s what happened in Europe during the Great Hyperinflations of the 1920s and the 1940s. And it’s what is happening in Venezuela today.
Hyperinflation is a political crisis
Most people do not realise that hyperinflation is more than just ‘really bad’ inflation. Normal inflation is an economic phenomenon: where price increases come from growth in productivity, or a shortage created by a drought, or a change in the international pricing of fuel.
But hyperinflation has a fundamentally different root cause.
Hyperinflation is what happens when a government abandons the standard laws of taxation, and instead, taxes the monetary system. It is what happens when a National Treasury withdraws purchasing power directly from every bank account. It is what happens when a population responds to this new fiscal policy by abandoning the use of their own currency.
Zimbabwean Hyperinflation 2.0
Zimbabwe has already been through one bout of hyperinflation. But once more, Zimbabweans find themselves in a situation where their purchasing power is being withdrawn from their bank accounts. And so there is a frantic dash to convert their bank money into cash.
This demand has created multiple parallel markets for money. There are premiums to convert RTGS money (bank money) into bond notes; to convert RTGS money into smaller denominations of US dollar notes; to convert RTGS money into larger denominations of US dollar notes (which are more transportable); and to convert RTGS money into new US dollar notes (which are accepted in other countries, unlike the dirtier versions that are circulating throughout the informal money market). And then there are the cross-premiums between those different forms of money.
I drew a diagram:
Clearly, the Zimbabwean economy is now barreling towards something. The question on everyone’s mind is: “toward what?”
Last time, the answer was “toward dollarisation“. But Zimbabwe has already gone down this road and reached that destination.
We’ve now moved passed that point, and into a twilight zone where even dollarisation was not enough to break this money-creation cycle.
The roadmap to this unknown destination
Here is what we can reasonably expect:
Prices will increase
This is obviously what it means to be in hyperinflation. But the pricing increases will not all be equal:
- The first prices to spiral will be anything that needs to be imported.
- Next will be any local manufactured products with imported inputs.
- Last will be the locally-grown grains and cereals that have already had their inputs for this season.
So the pricing increases will be more staggered than you might expect. It will also take some time for the supply chain to adjust their systems to this new inflationary environment (after all, Zimbabwe has spent most of the last decade undergoing deflation, ironically enough). But once they start, the price increases are likely to escalate incredibly quickly.
As prices increase, there will be price controls
This is almost inevitable. Zimbabwe is going into an election year – and dramatic price increases are not good for votes.
So shops will be forced to sell their goods at government-controlled prices.
Price controls will cause shortages
As soon as there are price controls, there will be product shortages. This too is inevitable. When companies are forced to sell below cost, they cannot replace their stock. And if the monetary environment is already causing problems with stock replacement – then price controls will instantly exacerbate the situation.
At which point, expect the election campaigning to involve accusations of hoarding, and declarations that the West is trying to influence the election outcome.
The above is common to all hyperinflations. There are price increases, followed by price controls, followed by shortages. And the political rhetoric always blames the situation on ‘hoarders’ and ‘malignant outside forces’. If you read the account of any hyperinflation – Germany, Austria, Hungary, Zimbabwe, Venezuela, etc – that pattern is almost always present.
However, the Zimbabwean situation today is slightly different to where it stood immediately before its first hyperinflation. And that difference is important.
From hyperinflation, to deflation, and back again
Hyperinflation, for all its evils, can come with some unexpected upside. Most industries suddenly find themselves to be very competitive with their exports – after all, during hyperinflation, their cost base is becoming cheaper every day, while they continue to earn real currency. And any manufacturer without an export base suddenly tries to expand into the export market.
This means that many industries have a type of ‘false boom’ during hyperinflation, and so they’re able to adjust the wages of their staff upwards. This allows the working class to survive – but it also allows the hyperinflation to perpetuate.
However, in Zimbabwe’s case, once it dollarised, those local industries immediately became uncompetitive. Local Zimbabwean costs were denominated in a strong dollar, while the rest of the region had costs denominated in weak currencies. This meant that:
- Local manufacturing industries declined; and
- The country became extremely reliant on cheap foreign imports.
The lack of an internal devaluation mechanism (ie. a local currency) meant that the country settled into a state of near-constant deflation. Prices came down, and unemployment soared. And today, Zimbabwe’s true unemployment rate sits somewhere close to 95%.
This means that there is not too much room for a ‘false boom’ this time. Most of the businesses that are left cannot afford hyperinflationary-style wage increases. And the vast majority of people are not earning salaries to begin with.
So the prices will increase. But not many people will be able to pay for them.
And once we start to see price increases in basic products like bread and maize meal, we face the prospect of widespread famine.
The basic summary: it will likely be worse than last time, but a new round of hyperinflation cannot last long. The fuel for that fire has long since been spent, and there is a risk that people will starve.
So where does it end?
There are only so many places for us to go from here:
- The short-term adoption of a weaker currency (#Randisation);
- A complete collapse of the Zimbabwean formal banking sector, followed by the political institutions, in which Zimbabwe turns into to a Somalia-type, Wild-West, anything-goes economy; or
- A bailout from the IMF and/or the World Bank, with all the political reforms that must accompany it.
And when it comes to crystal-ball gazing, about the best I can say is what I said earlier: hyperinflation is a political crisis. And a political crisis requires a political solution.
Unfortunately, something like Randisation is a short-term economic reprieve. It does not solve the problem – it can only defer it. The same would go for the new round of Afreximbank financing that the Reserve Bank has secured. It can give some breathing room – but only for so long.
As for option 2, this is really just the devolution of the political crisis to extinction. I doubt that there are many politicians who want this. Their power exists within a governance structure: and without that governance structure, the power vacuum is filled with warlords, not diplomats.
Which leaves us with option 3: Zimbabwe is headed toward political reform, supported by foreign funding.
This is not news. Zimbabweans have known for a very long time that the only real solution here is internal reform and foreign aid. And even the ZANU-PF elites appear to know this: why else would they go to such lengths to repay the arrears on Zimbabwe’s IMF debt?
So even if the short-term outlook is bleak, there is reason to hope.
Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha. Also, check out the RA podcast on iTunes: The Story of Money.
BaTs September 19, 2017 at 09:59
Is there possibility of the government removing the bond note completely and goibg back to 100% multicurrency?Reply
RA September 19, 2017 at 10:07
I doubt it. The problem is not the bond notes – the real problem is the creation of electronic money. Bond notes are a symptom of that, not the cause. And unfortunately, at this point, there’s no getting away from that.Reply
punduragroup September 19, 2017 at 11:36
Bitcoin and cryptocurrencies are the solution, there’s a reason why zim is the 3rd most likely country in the world to adopt Cyrptos – this is the why. Its just a matter of time till everyone figures out that its a much better method for the average zimbabwean.Reply
RA September 19, 2017 at 15:51
I’m afraid that we’re going to have to disagree on this! One underlying problem here is that Zimbabweans are uncompetitive due to the fact that they denominate their salaries in the strong US dollar (rather than a weaker Rand, Metical or Kwacha). If the country moved over to a cryptocurrency like Bitcoin, with its swings in value, the economy would still face the same problem of internal devaluation. Unfortunately, cryptocurrencies are still too volatile to function as genuine currency option. For now.Reply
punduragroup September 19, 2017 at 16:07
As a store of value and money in general, Zim fairs better, we cannot run away from the basic economic fact that we spend more than we make and so from an economic stand point, we can’t fix our money problems till we fix our fundamental economic problems, from a currency perspective, I would say Cryptos are a better store of value than USD and Rand. There are fluctuations yes, the rand fluctuates, the dollar fluctuates, and the nature of inflation in the dollar is not even known officially – from a personal perspective, I would definitely rather keep my money in cryptos.Reply
RA September 19, 2017 at 16:16
Yes, cryptos might work as a store of value. But they are a terrible medium of exchange – and that’s the primary problem that we face. If you look at how people are responding to this, people are finding ‘stores of value’. They are putting their money into equities and buying up non-perishables – and they might even be buying bitcoin. The bigger issue here is finding a medium of exchange that is not going to cripple us. And a store of value like crypto that cannot be used as a medium of exchange (both because of a lack of infrastructure, as well as a problem of having too volatile a value for you to want to use it to pay for groceries) is just as bad as having a medium of exchange that keeps losing value.
But perhaps that’s a topic for a different post!Reply
Chonx9 September 19, 2017 at 13:55
Thanks for this article. Its very well written and has presented various scenarios of how things could pan out for Zim. Im not economist or anything but what i do know from my basic layman’s understanding of this country is that the civil servant wage bill is way too high.
You said the Randisation is a short terms solution but i think its more medium to maybe even long term solution. If a town clerk earns (for arguments sake) R10 000 per month, there is no way that someone in the same position in Zim should be earning USD 10 000 (which is the case). It doesnt make any sense at all.
Our economy is strongly driven by the informal sector (flea markets, cross-border traders etc). If we adopt the Rand as our main currency it will be impossible for a loaf of bread in Mussina costing R10 to cost anything more that R12 in Beitbridge.
What is happening now is that importers put ridiculous mark-ups on everything and it is costly to the average citizen. The unfortunate thing is that we have a ‘willing buyer, willing seller’ attitude so nothing is ‘too expensive’ Zimbabweans have learnt to find a way to hustle and raise money to buy basic goods even if they are much more expensive than any of our neighbouring countries.
its really sad…..Reply
punduragroup September 19, 2017 at 16:24
I must mention however that I would recommend cryptos to run with a currency – even if this alluded notion of a “dollar” economy. Ways they would be useful:
1. Remittances. People sending money back to Zimbabwe can remit much easier and quicker with the BitcoinFundi Exchange. If we use the Dash currency for example, nomatter the amount of money sent, it will costs 6 cents at the moment. Take out all the middlemen fees from banks and agents etc – how much do we save as a country.
2. Public wages bill. If the average zimbabwean has control of his own money without government being able to dip their hands in it, the government has to wake up and solve its own wage bill problem and come up with a completely new form of governance which people pay taxes because they want to rather than just help themselves to state funds and buy Rolce Royce’s.
3. Banking the un-banked. The current financial system was never designed to work with Africa and its sparce population distribution. A phone that can have whatsapp can hold Crypto wallets, no matter where you are in the country you can send and receive money from anyone in the world and those struggling to pay for goods outside the country would gladly accept cryptos once they realise they are border-less.
All this said however, Government would have to come up with a new form of governance and tax collection method because they won’t be in control of the money supply anymore and as a result they either have to do their actual job or leave. It will be a change process that hurts, yes but necessary.
The average Zimbabwean will also have to learn to produce true value in order to get those cryptos otherwise they go hungry – true work rather than employment wasting internet and bandwidth on porn websites.
punduragroup September 20, 2017 at 08:34
It would be great to have a friendly discussion on this, I would love to discuss economics, cryptos, general solutions to the country. We have been looking at Smart Contracts as a method of revolutionising businesses and governance in this country to tackle corruption, it would be great to get your input on it.Reply
brokenOval September 20, 2017 at 13:10
I love your thoughts on Cryptos, and I do believe in the long term out look for Bitcoin and the like, however as a software developer with training in economics there are a couple of aspects I think are important:
1. Standardisation – there are literally hundreds of crypto currencies out there between bitcoin, litecoin etc – adopting one as a “national” standard will be difficult because you would largely have to guess at which one will become the international “standard” and I think we’re a good way away from this.
2. Uncertainty – As RA said, and leading from point 1, buying bitcoin right now is almost a lottery/ stock exchange. The market right now is hot and with such huge swings in value it will become almost impossible to predict or determine value. Even worse at a practical level when you’re trying to set your daily price of bread. All prices to some extent are influenced by commodity prices (e.g. oil/ fuel), but imagine a scenario where the price is in fact the commodity and there are no degrees of separation at all. It becomes so volatile it can’t really be practical.
3. Immediacy – this for me as a developer (in the payment industry) is the biggest issue, and to understand it you have to understand the way blockchain works. In order for a bitcoin to move from one person to another, the entire system has to be up to date. In short, before your transaction completes, every BC transaction in the world has to be complete and everyone on the platform (chain) has to know about your transaction. This is one of the benefits of blockchain (complete transparency & tracability) – however it makes bitcoin unsuitable for a POS transaction, where the transaction has to be complete in order for you to take your bag of shopping home. In reality a BC trnasaction can take 10 – 20 min to complete, and so is OK if you’re giving your friend some cash, but not if you’re holding up a line of people.
All that said, you have the benefits of a borderless currency completely insulated from politics or national economics and at an underlying level I think there is something in these key pillars. I believe a solution exists, not so much in crypto currencies but in a complete cashless society. Imagine for a second an electronic “bank” that lives outside of Zimbabwe that everyone can use for B2B or C2C or B2C. An exchange of funds that lives outside of Zimbabwes broken and dangerous banking system but has a real store of value for merchants to pay foregin suppliers, consumers to pay their electricity bill etc. In a perfect world, the same system could allow you to draw down cash from an ATM if necessary (all this interconnected technology exists).
The average person still has to move their existing money into a system like this which is the difficult part, but interesting none the less.Reply
Anonymous September 23, 2017 at 08:09
Most inciteful article I have read on this subject, great thesis.Reply
FallingOffTheBusTwice September 24, 2017 at 08:29
Cutting edge article. Question: Some people are reacting to the crisis by borrowing to the eyeballs hoping that the debt will be thrown away with bond notes or decimated by hyperinflation. What are your thoughts on thatReply