The Case of Zimbabwe’s Inflation: Part I

Since this is a complicated, sad, but interesting topic it should take two posts to really explain the full understanding of both inflation and the current situation in the African country of Zimbabwe. First, what is inflation? Inflation is simply a monetary phenomenon. It has been something in the United States’ political debates for years, but in recent times it has disappeared. It occurs every year and that wasn’t the case Pre-WWII. What is a monetary phenomenon? That is simply the government prints more money than it grows.

Zimbabwe has been experiencing very high inflation, which can do major damage to any economy. These excerpts are from The Economist:

“…now [inflation] officially running at 2.2m per cent a year and at least four times faster in reality, the central bank has been printing ever bigger denominations. But it is outrun by galloping prices: at last count the most valuable banknote available was for 50 billion Zimbabwean dollars, now barely 70 American cents on the black market…”

So what is the reasoning behind this? It is obvious that the government is printing money to try to pay debts and help itself, which is an indirect tax on the people. It becomes hyperinflation when the government begins to print money very rapidly.

“It may seem odd that the local currency is still used at all. From Z$25 billion to the American dollar at the beginning of this month[July ’08], the cash exchange rate had jumped threefold within a fortnight. In restaurants or shops, prices are still quoted in local currency but revised several times a day. Salaries are paid in Zimbabwean dollar, still legal tender. A minibus driver taking commuters into Harare every day still charges his clients in Zimbabwe dollars – but at a higher price on the evening trip home – and changes his local notes into hard currency three times a day.”

This is typical and predicted by Economists. The reason is menu prices increase costs in themselves alone, not to mention the fact that there is money constantly being injected into the economy. The only reason why the currency is still being used at all is because it is legal tender. The government could put you in jail for not accepting the money. This happened during the American Revolutionary War (of course among others). When the soldiers came to town to use their “colonial dollars” merchants and shopkeepers fled because they knew that they were required by law to accept it. Considering the Army itself is the enforcement it would hard to say no and get away with it.

This can only be fixed by Mugabe and his government to stop printing money or move to a new currency, which is more than likely what to happen.


Published in: on September 10, 2008 at 10:08 pm  Leave a Comment  
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