Now that's inflation.

[randomness]

In mid-May, the Reserve Bank of Zimbabwe released their latest series of paper money, the Agro Cheque, in denominations of Z$5 billion, Z$25 billion and Z$50 billion. Charity Dhliwayo, acting bank governor, says they are intended for "our farmers, who, starting this year's marketing season, are receiving competitive prices for their produce".

Here's a photo of the Z$50 billion note, snagged from an eBay auction:



(This note is currently worth less than US $50 at the market rate.)

From http://www.thewip.net/contributors/2008/05/zimbabwe_introduces_special_ba.html:

Like all Zimbabwean banknotes, the new notes are actually bearer's cheques with an expiration date. They expire at the end of the agricultural marketing season in December.

This becomes the fourth set of high denomination notes to be issued this year alone. The RBZ has had to constantly introduce new bills as hyperinflation in the country continues unabated.

Only a fortnight ago, the central bank introduced Z$250 million and Z$100 million notes. A Z$50 million and Z$10 million note were launched in April and January respectively, while Z$250,000, Z$750,000 and Z$1million notes were introduced in December of last year.

Zimbabwe is battling the world's highest inflation rate, currently at 355,000 percent. The high inflation rate has ravaged the value of any new notes within just a few weeks, a trend that has caused frequent cash shortages.

Comments

[tactical-grace.livejournal.com]

Yes, but if you are willing to help me transfer $50 billion dollars out of Zimbabwe, I will offer you a 15% commission!

[choirsoftheeye.livejournal.com]

Can you explain to a econ-neophyte such as myself what causes inflation like that? I have a bit of a grasp on more moderate inflation, but it seems like some form of mass hysteria would have to be extent for prices to spiral that fast.

Also? Why don't they just introduce a new currency altogether. I mean jeez, their notes are going to start being all '0's.

[(Anonymous)]

yes yes, me too please! i'm also confused. also, this means that a loaf of bread is like, 3 million or something, right?

[r-ness.livejournal.com]

A billion, according to the Christian Science Monitor, but that number is probably already out of date.

[signsoflife.livejournal.com]

Yeah, ditto. I just don't understand how money can be meaningful at all with 355,000 % inflation.

[r-ness.livejournal.com]

Mostly, it's not.

[r-ness.livejournal.com]

Can you explain to a econ-neophyte such as myself what causes inflation like that?

In this case, it's because the government keeps printing it in order to pay its debts.

Why don't they just introduce a new currency altogether.

They knocked four zeros off the currency in August of 2006. The obvious success of that move convinced the government that introducing yet another currency was unnecessary.

[choirsoftheeye.livejournal.com]

So is most inflation that simple? I thought in more normal situations (like the U.S., currently) it had to do with commodity prices...

[cerebralpaladin.livejournal.com]

Inflation definitionally has something to do with commodity prices-- if the prices of all commodities is going up, then that's inflation-- but it's more complicated than that. Inflation is pretty complicated in general, but a lot of it has to do with expectations. Money is only worth what we believe it's worth. If you think that $3 will get you a loaf of bread, and the store thinks that $3 will pay for all of their costs (ingredients/wholesale price, labor, cost of capital) and give them a profit, then you'll be willing to buy bread for $3 and they'll be willing to sell bread for $3. But if they think that prices are going up (i.e. they have an expectation of inflation), then eventually they'll think that you'll pay $4 (and that they'll need to charge $4 to keep making a profit, because their inputs are increasing in price). When they mark their prices up, that's inflation.

So the question then is what causes an expectation of inflation. One cause can be increases in the prices of specific commodities (i.e. the current oil price spike). But that doesn't necessarily cause more general inflation, which is why the Fed watches "core inflation" (excluding energy and food) more than it watches total inflation. The expectation currently is that if oil prices drop, the prices that are up because of oil will drop, too. Another cause can be general expectations of inflation-- if people expect prices to go up by 5% in the next year, that will tend to cause inflation. Another cause can be low unemployment-- because scarcity of labor increases wages, people have more money with which to buy stuff, so they bid up prices, which is another way of saying they cause inflation. (Note that inflation is not inherently a bad thing. High inflation is, but some inflation is good (partly because deflation is counterintuitively disastrous), and it may be good to have low unemployment and moderate inflation, as opposed to high unemployment and low inflation.) Finally, money supply matters. If you expect other people to have more money, then you expect your money to be worth less. In the US, that mostly comes in through the Fed setting interest rates-- low interest rates essentially make more money (this is not technically accurate, but it's good enough for the hand-waive), which makes the economy go faster but also creates inflation.

Zimbabwe has a combination of very strong, very entrenched inflation expectations, and loony monetary policy-- just running the printing presses to make more money. That creates a vicious cycle, which has essentially destroyed their currency.

I should note that I'm not at all an expert in economics, so there are probably omissions and may be errors in this, but I think it gets the basic story right.

[r-ness.livejournal.com]

In this particular case I think the inflation expectations resulted from the loony monetary policy. Zimbabwe's exchange rate was relatively stable before they started running the printing presses.

[cerebralpaladin.livejournal.com]

Oh, yeah. I'm not saying that it just happened spontaneously. But part of the problem is that even if Zimbabwe adopted sensible monetary policies, its currency would still be wrecked. And because inflation is very high, the government doesn't have a lot of attractive solutions. Does it stop paying people? Require taxes to be paid in foreign currency, and then pay government employees in foreign currency? Now that inflation is insane, it's not clear that there's any clean way out (although I'm confident that Zimbabwe's government will find a terrible path when choosing from a set of bad options).

What I don't get is why people accept transactions in the local currency at all. I would think that using foreign money (or even barter) would be sufficiently more attractive that the local currency would fall out of use. That might be illegal, but you would expect large gray markets to exist then. Do they? Or is there some good explanation why people continue using the Z$?

[r-ness.livejournal.com]

Or is there some good explanation why people continue using the Z$?

The short answer is that the government made it illegal to trade in foreign currency without a license, and then made it impossible for anyone without government connections to obtain that license.

Of course, this didn't stop people. Black markets did come into existence, but this being Zimbabwe, the dangers in getting involved in it were not limited to legal sanction, but also included the risks of being beaten up by the ZANU-PF party militia, having the foreign currency confiscated, and/or simply being killed.

[choirsoftheeye.livejournal.com]

Thanks, that was helpful.

[comicoffee.livejournal.com]

Ooh ooh! Can I get one and tell people I'm a billionaire (with an asterisk)?

[r-ness.livejournal.com]

You can! They're selling these worthless bits of paper on eBay, which is where I got the image.

There's a ridiculous mark-up, though. I'd wait until the whole thing collapses and you can get them as collectors items for next to nothing.

Or you can get some Yugoslavian dinar notes from the 1990s:

[evilmagnus]

You're missing the bigger picture here.

They have six-legged camels in Zimbabwe!

[jimmystagger.livejournal.com]

HA! I hadn't noticed that evilmagnus! Good eyes.

Anytime your nation resembles (economically or otherwise) the German Weimar Republic- yeah, you're a failed state.

[r-ness.livejournal.com]

I think they're giraffes, actually, but sure. :)

[meepodeekin.livejournal.com]

I hate to break up the party, but there are clearly two heads. As far as I can tell there are also seven legs. :)

[evilmagnus]

IT IS WORSE THAN I FEARED!

[cattitude.livejournal.com]

I'm guessing the expiration date is such that when the note expires, it will cost around its face value to print the next one at a higher denomination.