Understanding the Zim hyperinflation

Reading stories going five years back on The Zimbabwe Situation website, one can’t help but be concerned about how poor the understanding of the causes of the Zim hyperinflation was and still is.

Letters written by Zimbabweans to family and friends abroad shows it was commonly believed that Robert Mugabe’s farm redistribution and invasion policies were the root cause of the hyperinflation.

While the farm invasions would have naturally led to a decline in food production, a decline in food production cannot cause hyperinflation. A decline in food production can drive food prices higher but it cannot lead to electricity outages and fuel shortages nationwide. There was something else at play.

Higher food prices is the market’s way of calling forth new supplies, i.e. to entice farmers to produce.  The new production would have helped cap or even reduce food prices again, in other words, lowering inflated food prices.  If land invasions and reduced food production caused the hyperinflation, why does a country like Singapore which produces almost no food not experience chronic hyperinflation?

The hyperinflation was caused by the central bank of Zimbabwe when it printed billions of Zim dollars to pay off foreign debts and to pay public salaries. The more they printed, the less valuable the currency became, which led to a decline of the foreign exchange value of the currency, causing money prices of goods (both domestic and external) to shoot through the roof.

Now you may be wondering, “but if higher prices call forth new production, why didn’t it?” Well, even if they  wanted to, new or existing farmers could not have produced and sold goods at a market rate that would’ve made production profitable.  Inflation distorts the production structure as it drives up input costs to the point where entrepreneurs don’t deem it profitable to produce for consumers.  Margins are squeezed to the point of losses.  When consumers’ salaries can’t keep up with the rate of inflation, entrepreneurs step back in their entirety and the supply of goods dries up.  Basic commodity prices rise faster than the price consumers can or are willing to pay for an end product, and voila, a breakdown in the production structure leads to spiraling prices.   At this point the Zim government thought it expedient to implement price controls that forced farmers and retailers  to sell basic foodstuffs at a pre-determined price, at a rate way below what the goods were worth on the market.  Which entrepreneur would use his own money to invest in agriculture to produce something that costs R20/kg but only be allowed to sell it for R5/kg?  The Zim government’s solution to this was to print even more money to subsidise producers, reducing the value of the currency even more, driving prices even higher.

The money printing made it too expensive to even buy basic essentials, never mind consider producing anything.  Consider what Cathy Buckle wrote in November 2007: “This week strangely enough there were baked beans in one local supermarket but they were 1.2 million dollars a tin – five hundred times more than the cost of a four bedroomed house on an acre of land in 2001.”

So in the four years 2005/6/7/8 prices spiraled out of control as the economy collapsed, destroying the social fabric of Zimbabwe. What is frightening is that only 1 out of 50 popular media articles analyzing the Zimbabwe economic collapse during those years mentioned rapid money supply growth and fiscal deficits being run by the Zim government as being a cause of the hyperinflation. While the country was falling apart owing to government money printing and other interventions in the market – hardly anybody looked to the root cause of the problem: The Reserve Bank of Zimbabwe!

In January 2009 when the Zim dollar was abandoned, consumer prices immediately stabilized. Prices even began to fall toward the end of 2009, but what happened? Mugabe was still in power, with Tsvangirai marginalized. The ‘output gap’ was still around 80-90%. Farmers didn’t immediately boost agricultural output, yet prices began to fall! The only thing that happened from January to February 2009 was that the central bank stopped printing Zim dollars and allowed the use of foreign currencies in the economy.

The sudden and abrupt end of hyperinflation in Zim is an example from the real world which shows that money printing is inflation, nothing else. The fact that the public still has blinkers on while major central banks of the world today are printing money Zim-style is scary stuff.  The European Central Bank just some weeks ago pledged to print EUR1 trillion to bail out bankrupt governments like Greece.  The US Federal Reserve in 2008/9 printed over $1.2 trillion to save failing banks.  The Bank of England printed GBP200 billion in an attempt to save their own banks.  The Bank of Japan pumps liquidity into its banking system almost every week.  This is massive inflation as all these guys know to do is to print, print, print money.  Just like the laws of physics, the laws of economics work everywhere.  A ball thrown into the air in Zim falls in the same way as a ball thrown into the air in Washington DC.

People who say South Africa will go the same path as Zimbabwe in terms of a catastrophic economic collapse through hyperinflation, by referring to Malema’s populist calls to nationalize the mines, are way off the mark.  Economic activity will slow down, for sure, as private property rights are undermined and as the government runs the mines into the ground – Soviet style.  But, the only way for South Africa to go the hyperinflationary route of Zimbabwe would be if the South African Reserve Bank does what the Reserve Bank of Zimbabwe did: print money to give to the government to spend as tax revenues decline.