Hyperinflation Déjà Vu—Can What Happened in Zimbabwe Happen In U.S.?

The WealthCycles Staff

Even though the Presidential election is over and all of the accompanying hyperbole has ceased, the future of the U.S. economy is still on the minds of many. A poll taken by Fox News prior to the election reported that the #1 concern among voters was not jobs but rather price inflation. In the face of that citizen concern, the Federal Reserve is pursuing the worst possible course of action—QEfinity (the most recent iteration of Quantitative Easing—the expansion of the currency supply by buying up U.S. government debt from banks). If you don’t believe us that it is indeed the worst possible course of action, witness Zimbabwe.

Dr. Gideon Gono was first appointed Governor of the Reserve Bank of Zimbabwe (RBZ) in 2003 and was reappointed to his post with a new five-year term beginning in 2008. Many found Gono’s reappointment astonishing, given that Gono reigned over what is arguably the worst episode of hyperinflation the world has ever seen.

Gono’s monetary policies from 2003 and until recently depended on the continued printing of Zimbabwe dollars (Z$) to help build liquidity in the otherwise depressed economy. As expected and predicted by most global economists, Gono’s policies resulted in a devalued Z$ and the attendant hyperinflation.

The first indications that the wholesale printing of Z$ was having an adverse effect on the Z$ came in August 2006:

In 2006, the Reserve Bank of Zimbabwe created the new (second) Zimbabwean dollar by chopping off three zeros. It still wasn’t hyperinflation. Just plain inflation. In March 2007, the Z$ 500,000-note was issued, signaling the official arrival of hyperinflation (more than 50% inflation per month). By 2008, the Zim dollar had become useless for transactions. To keep the country from total collapse, authorities finally allowed transactions to be made in [Fed] dollars.

Despite all the machinations of the RBZ, or rather because of these manipulations, the Z$ finally met its end in 2009 when the one-hundred-trillion note was issued. That’s right, one-hundred-trillion.

Shortly after the issue of this note, the RBZ once again attempted to save the Z$ by redenominating it and issuing the fourth version of the currency by dropping off 12 zeros. This time, though, Zimbabweans would have nothing to do with it, and the currency was abandoned in favor of a multi-currency system, in which citizens simply saved in and transacted in whatever currency they felt served the situation best; whether dollars issued by the Federal Reserve, South African rand or British pound. The people of the U.S. deserve this same freedom. See Free Competition in Currency Act Gives Americans Freedom of Choice.

If you remember the definition of quantitative easing, you may recognize the actions and policies of Gono.

A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity.

Having suffered through the catastrophic results of his own country’s money printing policies, Gono has now come to see, and to publicly state, that QE can and will lead to a devalued purchasing power of currency and is likely to generate hyperinflation (a total loss of confidence in the currency as a store of value). Ironically, having experienced up-close and personal the dangers of QE, Gono, who has been jokingly referred to as Fed Chair Ben Bernanke’s mentor, recently commented on the Fed’s decision to implement QE3:

2.17 These interventions which were exactly in the mould of bail out packages and quantitative easing measures currently instituted in the US and the EU, were geared at evoking a positive supply response and arrest further economic decline.
But even still,
2.20 Despite numerous intervention measures undertaken by Government through the Reserve Bank of Zimbabwe, economic activity continued to decline progressively with inflation peaking at 231 million percent by July 2008. 

But could Zimbabwe-type inflation really happen in the U.S? Of course it could. Even though the world’s elite central planners, Ben Bernanke included, will try to convince us that the U.S. is stronger, smarter and, well, more special than nations such as Zimbabwe, if Gono recognizes the inherent similarities between his ill-fated policies and those of the Fed, surely our state economists can do the same.

Furthermore, if the policy of inflation via printing (QE) lead to disaster time and time again throughout history, what has Gono decided is the best manner to manage national currency?

“There is a need for us to begin thinking seriously and urgently about introducing a Gold-backed Zimbabwe currency which will not only stable but internationally acceptable,” he said in an interview with state media.

“We need to re-think our gold-mining strategy, our gold-liberalisation and marketing strategies as a country. The world needs to and will most certainly move to a gold standard and Zimbabwe must lead the way.”

Gono said the inflationary effects of United States’ deficit financing of its budget was likely to impact other countries to leading to a resistance of the green back as a base currency.

“The events of the 2008 Global Financial Crisis demand a new approach to self reliance and a stable mineral-backed currency and to me, Gold has proven over the years that it is a stable and most desired precious metal,” Gono said.

“Zimbabwe is sitting on trillions worth of gold-reserves and it is time we start thinking outside the box, for our survival and prosperity.”

So the man who compelled the printing of the hundred-trillion dollar banknote has turned to the time-honored stability and the accompanying market-based price mechanism of allocating resources? As George Shaw derived from Marcus Cicero:

A man or woman who can not change his or her mind, can not change anything at all.

Of course, the idea of a gold-backed note is not new, and got Libya bombed from the north. Thankfully Zimbabwe has little sweet light crude to exchange in their new and righteous demand for a sound money base upon which to rebuild. We await more good news as it spreads.

Ok. Great, thanks for your reply and your hard work in helping to educate us. I sometimes try to educate my family and friends on the convenience of having some physical silver, but I more often than not come across some scepticism so it is good to have upfront replies to possible questions they may think of.

btw, I live in Europe, so I am translating this to a Euro scenario, but I guess in a globalized world we will all be affected.

Thank you for the appreciation!

With respects to the euro, indeed, we will all be affected.

We often get questions from natives to Asian counties with little correlation to the dollar or euro wondering the same question. We reply that as faith in fiat currencies wanes, none will be excepted. When the Fed's dollar falls, all will fall.

Only silver and gold will remain with purchasing power intact, and as those with paper rush to divest from it, holders of silver and gold will see appreciation beyond the normal maintenance of purchasing power silver and gold money provide in normal times.

To paraphrase Mike Maloney:

This is the greatest wealth transfer in the history of mankind, and therefore it is the greatest opportunity in the history of mankind.

Good on ya for trying to educate your family and friends.

An easy and fun place to start is with the video lectures on the Youtube Mises channel, especially Jeffrey Tucker, Robert Murphy and Tom Woods. If you find the perfect one, convince them to watch it.

Just to play devil´s advocate, some would say that the US dollar cannot experience the same level of inflation as Zimbabwe because, as a result of its world reserve currency status, its money supply is much broader than for a small country such as Zimbabwe. Therefore it would be very difficult to multiply the USD currency supply by the same multiples as experienced by ZWD, i.e. it is much easier for a small country to experience hyperinflation than a big one.

Moreover, I believe the monetary base (printed by the Federal Reserve) constitutes only around 3% of total money, due to fractional reserve banking. So, for example, doubling this monetary base, due to money printing would not increase significantly the total money supply, unless this was all loaned out to the broader economy which I understand is not yet the case.

These points would appear to undermine the case for hyperinflation in the US. However, if someone does not agree with the above I am happy to hear counter arguments.

You are only looking on one side of the equation, the supply of money side. There is also another side and it is the velocity of money (how fast the money changes hands or how long a person keeps the money before making the next transaction). What usually happens in hyperinflation is a drastic rise in the velocity. This has all to do with faith in the currency.

What probably will happen is that some investors are starting to get out of the dollar by buying Gold or other hard assets. More dollars are coming back to the states causing inflation to rise a little bit making interests a bit higher.

If that happens the government has to print mote, cut more or tax more. I think more QE will follow or if they tax or cut there will be deeper recession.

Eventually this will feed a negative spiral causing more people and more rapidly exiting US dollars for hard assets.

Next step will be an increase in the velocity of dollars and when that happens it is a self feeding process ending up i Hyperinflation.

"There is also another side and it is the velocity of money (how fast the money changes hands or how long a person keeps the money before making the next transaction)."

Mises is quite specific on Velocity, it is not the other side of an equation, it is merely a monitor of one symptom of price inflation, rather than an input factor.

True it will rise, and we agree with all of your comments in general, but think about rising prices as individuals agreeing to transact ascribing lower and lower value to dollars as supply increases relative to goods desired. Nevermind, here is Mises:

"In analyzing the equation of exchange one assumes that one of its elements--total supply of money, volume of trade, velocity of circulation--changes, without asking how such changes occur. It is not recognized that changes in these magnitudes do not emerge in the Volkswirtschaft [political economy, or more loosely 'economy'] as such, but in the individual actors' conditions, and that it is the interplay of the reactions of these actors that results in alterations of the price structure. The mathematical economists refuse to start from the various individuals' demand for and supply of money. They introduce instead the spurious notion of velocity of circulation fashioned according to the patterns of mechanics." (Human Action, p. 399)

Furthermore money never circulates as such:

"Money can be in the process of transportation, it can travel in trains, ships, or planes from one place to another. But it is in this case, too, always subject to somebody's control, is somebody's property. "(Human Action, p. 403)

Thank you for the Devil's advocate stance & comments:

"unless this was all loaned out to the broader economy which I understand is not yet the case"

No, it isn't, but this fact surely does not preclude the inevitable. So no undermining going on so far.

Price inflation triggers the loss in faith of the currency as a store of value (hyperinflation), and has happened time and time again (in the U.S., Germany, on and on) ...

1.6b in new base can provide 16t in new $ added to 30t existing. This does not account for QEternity, nor the psychological effects of brisk drops in purchasing power where previous users of the currency abandon it (think entire countries), leaving the banknotes to pile up for the rest of the world.

If anything, the extent to which the Fed's dollar has been printed and spread around the world boosts the case of a tsunami of dollars hitting our exceptionalist shores.

We know what you mean though. On that, consider this:

Rates of price inflation are not the same as rates of inflation, and a larger denominator makes a ZWD-equivalent percent change in inflation (the supply of currency) smaller, true, whereas rates of price inflation in the U.S. are predicated solely on expectations of those using dollars, and the ongoing global de-dollarization giving us more of the Fed's paper to bid up prices with.