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Going... Going... Gono.
From breadbasket to basket case... lessons from the world's inflation capital
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Among the many curiosities, back eddies, and ironies in the financial world is this: equities can go up, even as an economy goes down. In the news yesterday morning was this report from Zimbabwe. Bloomberg:
Zimbabweans Drive Stocks Up 600% in Rush to Dodge Currency Crash
Zimbabweans often turn to equities as a haven from currency meltdowns and episodes of hyperinflation, as happened in June 2020 when the inflation rate reached 837%. The bourse in Harare, the capital, briefly halted trading on Tuesday when the jump in the all-share index breached a 10% limit introduced in April, the second time that’s happened.
Like taking heroin, once you get in the habit of printing money, it’s a hard one to give up. Not that you don’t plan to do it…promise to do it…and even try to do it. But in the end, you just don’t want to do it. Zimbabwe has been fighting inflation, depression and hyperinflation for nearly 20 years. No sign of victory yet!
Breadbasket to Basketcase
Zimbabwe used to be the “breadbasket of Africa,” with rich fields of wheat and tobacco…at the center of a thriving agricultural economy. You can say what you want about the evils of colonialism, but at least the colonials knew how to run an economy. Zimbabwe flourished even after it gained its independence from Britain in 1979.
But in the early ‘90s, politics gained the upper hand. The Mugabe government began its own reparations program, taking land from white farmers and distributing it to Mugabe’s cronies. The whites fled. Food production dropped. Unemployment soared to 80%. Tax revenues fell…and the government turned to the printing presses. Consumer prices rose.
In 2007, the government took forceful action against inflation. No, it did not stop printing money. Instead, it declared it illegal to raise prices. Corporate executives who tried to keep up with inflation by raising prices were put in jail. This had the effect of stopping output all together. Commercial activity shifted to the black market. A loaf of bread, for example, could be bought, legally, for about 500 million zim dollars. On the black market, which was the only place you could normally find bread, the price was $Z10 billion. By July 2008, the inflation rate was believed to be 250 million percent.
Of course, by then it was impossible to keep track of prices. Because there was not much left to put a price on. And in 2009, the Zim dollar was abandoned altogether.
No Food, No Fuel, No Nuthin’
Things settled down. Business returned, using the US dollar as the substitute currency. But in 2018, the authorities went back to their old tricks. A new Zimbabwean dollar was introduced. A year later, the inflation rate was said to be over 500% and today, prices are going up at about 200% per year.
For a long time, we carried a memento of the hyperinflation period – a Zim bill said to be worth $100 trillion dollars. With that and US $5 we would have been able to buy a cup of coffee in Harare, the nation’s capital. But there was no coffee in Harare. Or anywhere else in the country, because nobody wanted to take Zim currency in payment for anything. So, the shelves were cleaned out. And soon, there was no food. No clothing. No fuel. Almost nothing.
And that was when Gideon Gono, head of the Zimbabwean central bank, made the discovery that will prevent the US and other nations from dealing forthrightly with the inflation scourge. He recounted the experience to our old friend Doug Casey, years later.
“Yes, of course we could have stopped printing up ridiculous amounts of money,” he said, or words to that effect, “but people needed more and more money just to buy necessities. The situation was terrible. But it would have been even worse – including civil war – if we hadn’t kept the presses going.”
Cold Turkey
What Mr. Gono was describing was the advanced stages of what we call the “inflate or die” dilemma. Once you’re hooked on inflation, in other words, it can be very hard to give it up. Stock prices, corporate profits, household earnings…rich and poor – all depend on more and more money. You have to keep inflating or the whole thing collapses. Even an honest politician thinks twice before cutting off the thing everybody most wants – more money. Going ‘cold turkey’ is painful. It is much easier just to keep printing money.
This is a particularly dangerous predicament when your society is in the grip of empire builders, as the US is now. Many times have we mentioned the sad case of Takahashi Korekiyo. He was in charge of the central bank of Japan in the 1930s, when the country’s military/industrial complex was aiming to take over all of East Asia. It was to be a “Co-Prosperity Sphere,” with Japanese management and capital, along with the labor and raw ingredients of China, Korea, Vietnam, and Indonesia.
But the war machine cost money. And when Korekiyo tried to turn it off, in 1936, he was assassinated.
“Inflate or die” must sometimes be taken literally.
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