Zimbabwe’s hyperinflation problems are the stuff of economic legend. No matter how bad our inflation problem gets here, one can bet theirs will be a lot worse. Just last week, CNBC had a headline still beyond comprehension for most Americans:
Zimbabwe hikes key interest rate to 200% from 80% amid runaway inflation
To clarify, it does not say 200 basis points (i.e., 2%), rather 200 percent!
This is the destruction of a currency and the abandonment of free market principles. It is theft, socialism, and capital destruction. Given all that Austrian economists have offered when writing about inflation, it is absolutely unnecessary for any country to endure this Keynesian perpetual state of boom.
And what prompts a central bank to hike interest rates to 200%? Naturally, the country’s:
Annual inflation rate has been in triple digits for two straight months, rising to 191.6 percent in June from 131.7 percent in previous month.
The Zimbabwe dollar is also in freefall as it:
…has dropped 69 percent to $361 per US dollar.
Contrary to popular economic myth, a weak dollar doesn’t necessarily make exports more attractive. If that were the case, Zimbabwe would be one of the largest exporters in the world. Consider other problems such as how unattractive currency debasement is to anyone wanting to do a long-dated project, the unworkability of sky-high interest rates, and general uncertainty for multinational companies, foreign investors, or entrepreneurs wishing to do business in Zimbabwe…
Making matters worse, the Russian/COVID narrative rears its ugly head:
Surging commodity prices stemming from disrupted supply chains because of the Russia-Ukraine conflict and the lingering effects of COVID-19 lockdowns have compounded pressure on the local currency of Zimbabwe.
We’re even offered a glimpse of past government/reserve bank interventions:
Previous attempts to prevent the Zimbabwean currency’s collapse have included a 10-day ban on bank lending, restrictions on trades on the Zimbabwe Stock Exchange, allowing companies to pay taxes in the local unit and introduction of a new interbank rate.
It was then announced by finance minister Mthuli Ncube that they are going to “legalize” the use of US Dollars for the next five years in order to “steady” the Zimbabwe currency. What should be evident by now is that there really is little difference between the Reserve Bank of Zimbabwe and America’s Federal Reserve. They both seem to draw from the same textbooks, raising rates to fight inflation, ignoring the money supply and Austrian economists. Things are working better in America not because of monetary policies, but despite monetary policies.
If this still does not resonate, then take a look at their M2 money supply:
Their belief that raising rates will cure inflation, or hyperinflation, is analogous to pouring a cup of water on a burning barn to put out a fire. Rates are important in many ways; but the secret behind Zimbabwe’s currency destruction lies in their ability to expand their money supply in unimaginable ways, not unlike America’s central bank which created $5 trillion (doubling of the balance sheet) in the same two-year period.
For over a century, numerous authors have written about this. Dating back to antiquity we’ve seen the problem of expanding the money supply. The Mises Institute has countless resources and books to read free online, such as What You Should Know About Inflation, The Mystery of Banking, and of course, The Theory of Money and Credit. A list of 100 books could easily be compiled, but those are some of my personal favorites. Just one of them should suffice to cure Zimbabwe’s lingering problem of hyperinflation.
The consequences that come from stopping the money creation process pales in comparison to the currency collapse that comes from continuing the money creation process. In the former scenario, there is short term pain, but the country will eventually be able to move forward due to having an honest currency; while in the latter, the country will never be able to.
I’m going to email this article to the Reserve Bank of Zimbabwe at info@rbz.co.zw. Hopefully someone there will look to the free market to solve their problem rather than rely on more intervention and more money creation.
