It is obvious
today that coming soon to
The tough
political decisions of cutting spending and allowing a larger recession will
not happen. The only other method of
financing the debt is printing money. We know from the history of many countries
what happens when governments simply print
money to pay the government debt, but we only have to look a couple of
years back at Zimbabwe to see the ultimate outcome.
Just like
Just like
President BO,
Those who were
producing wealth left the country and nothing expanded but government
employees. Government employees produce nothing and never will. As time went on there was no production to
pay taxes and the government had no choice but to print more money. This is exactly what is happening now in
The object of
telling the story of
As you will
see, the world will not end and the nation will go on and maybe even better,
but all savings in dollars will be lost, banks will close, there will be no
credit and the entire system will start over. Billionaires will loose all their
wealth, and all money transactions will end.
People will
survive by using other means of trading, work or goods for other goods and
work, foreign currencies, or precious metals like gold and silver. Once the dollar totally collapses hyperinflation
will revert to extremely cheap goods and services overnight.
What we should do but won’t
The right alternative
for eliminating excessive debt is to take the tough political decision of
allowing 'too big to fail' companies to fail and accept the unpleasant economic
consequences. Excessive Government spending should be curbed.
A sound
currency, elimination of all rules and controls in a completely free market
will produce a much better result in the long term. If this option were
adopted, the short term would likely be extremely unpleasant, possibly
including an economic depression.
It is doubtful
whether any Government today has the courage to take this route. Sadly this
implies that the world is headed down the path of currency destruction that
will eventually result in a Zimbabwean situation for the elimination of debt.
Most important, the
Printing money
in Zimbabwe
In
This eventually
led to inflation gathering momentum to the point where the armed forces were
getting rebellious - they wanted more money. When Mugabe caved in to these
demands, the Zimbabwe Dollar plunged.
(Their money did not buy anything.)
Shortly after
Mugabe was elected President in 1980, the Zimbabwe Dollar was worth more than
the US Dollar. The ongoing abuse of the financial system eventually produced a
runaway inflation. The largest bank note issued in
The worst
trauma for ordinary people during the hyperinflation was lack of food. This was
due mainly to the imposition of price controls. If the cost of production of an
item was $10 and the price controllers instructed that the item could only be
sold for $5, the business would soon go bankrupt if they sold at the controlled
price. The result was that production and imports just dried up, hence the
empty shelves in the supermarkets.
People survived
by shopping in neighboring countries and relied on assistance from
There has been
a major exodus of Zimbabweans over the years, estimated at about 3 million
prior to 2008. Many of these were qualified people who were subjected to
Mugabe's campaign of terror. During the latter stages of the hyperinflation
there was a further exodus because people were starving. Most of these people
went south into
THE
POLITICAL SITUATION
To understand
what has happened and is happening in
Prior to the
arrival of the white settlers, the Shona tribe
occupied the northern part of the country called Mashonaland,
and the Ndebele tribe were ensconced in the south, called
The Shona, in particular, have never forgotten this. Mugabe,
who is from the Shona tribe, has made it his life's
work to recover for his people the land that was "stolen" by the
whites. He has repeated this statement on many occasions.
A book by
Martin Meredith titled "MUGABE: Power,
Plunder and the Struggle for Zimbabwe" published by Public Affairs,
gives a very readable account of the recent history of
Returning to
the white settlers, there was always an
unfair division of land between whites and blacks. This was accentuated
after the Second World War when
In 1962 Ian
Smith's Rhodesian Front party swept to power on their policy of maintaining the
status quo for the white farmers. During the 1960s
On 11 November
1965 the Smith government made a Unilateral Declaration of Independence which
they claimed had precedent in the USA Declaration of Independence in 1776. This
triggered a range of reactions. Sanctions were imposed by
Smith
introduced the Law and Order (Maintenance) Act which allowed the government to
literally do anything without recourse to the Courts or rule of law. One of his
first acts was to imprison four black nationalist leaders
without trial or publicity. Mugabe was one of these 4 and he spent the
following 11 years in prison. He was released in 1974 during a brief cease fire
between the Rhodesian forces and the liberation movements. Mugabe took the
opportunity to escape across the border into
The terror war
became increasingly vicious on both sides. Rhodesian forces regularly crossed into
neighboring territories, dealing brutally with the local population suspected
of harboring terrorists. The neighboring countries eventually insisted that a
peace deal be consummated. They would no longer tolerate liberation movements
on their soil. Mugabe reluctantly agreed. The guerrilla war had spread to all
corners of
In early 1980
the country became independent and changed its name to
Mugabe, despite
initial claims of moderation, set about entrenching himself as president, a
position he wanted to claim for life. Surprisingly Mugabe did not repeal the
Law and Order (Maintenance) Act that the white regime had used to cover its
many evil acts. Mugabe relied on its terms to justify the terrible things that
he perpetrated over the ensuing 3 decades.
These
atrocities are recorded in Martin Meredith's book "Mugabe" and there
is no point detailing them now. Suffice to say that he was bent on eliminating
his opponents and intent on punishing anyone who criticized him. His Zanu-PF people infiltrated the army and the police force
and were at his beck and call to act as thugs when required. Faithful people
were rewarded with a range of patronage that he dispensed.
He found a
compliant partner in the Governor of the Reserve bank, which became Mugabe's
source of funds to pay his people and to dispense his patrimony. Needless to
say, much of the money came from printing new Zimbabwean dollars, which caused
inflation to gradually increase. Finally the army and police forces to got
cranky, publicly demanding much higher pay.
Official, black
market, and OMIR exchange rates Jan 1, 2001 to Feb 2,
2009. Note the logarithmic scale.
Clearly Mugabe was responsible for the
hyperinflation. The causes were those always present in these events. A weak
economy, large government budget deficits, inability to borrow funds combined
with the political decision not to cut Government spending. Governments are
reluctant to lay off government employees, especially those related to the
armed forces. The latter might invite a military coup. The only source of
funding left is the creation of new money.
A very
important factor in assessing the current situation is that Mugabe no longer
has his own private source of funds to continue with his system of patronage.
The army, police force and civil servants are paid by the Unity Government.
Mugabe's power base must be disintegrating rapidly. He has also become very
unpopular. It seems unlikely that he could win an election again, even if he managed
to get his thugs to resort to intimidation. People identify Tsvangirai
and the MDC with the new monetary disposition and the improved economy, while
Mugabe is correctly blamed for the trauma of hyperinflation.
There is also
the question of sanctions. In recent speeches Mugabe has said that it was time
for sanctions against
This
combination of circumstances, combined with the fact that he is 86 years old,
suggests that Mugabe must be under pressure to resign. It is a logical
deduction that behind the scenes Mugabe must be attempting to negotiate a form
of amnesty against prosecution. The next month is important as the SADC, which
guaranteed the terms of the recent Unity Government, has given Mugabe until 6
December 2009 to comply with all outstanding issues. Details of developments
and current
http://www.zimbabwesituation.com/
Alf Field 11 November, 2009
In February
2009
It is now a
country without a functioning Central Bank and without a local currency that
can be produced at will at the behest of politicians. Since February 2009 there
has been no lender of last resort in
Price controls
and foreign exchange regulations have been abandoned.
I recently
visited
The first part
of this article deals with economics, the hyperinflation and current situation,
which is a picture of recovery and potential vigorous growth. The second part
deals with politics, both the historical aspects as well as current
developments, which are extremely fluid.
We were
fortunate to have private interviews with the Prime Minister, Morgan Tsvangirai, and a wide range of business leaders. This
provided a quick picture of
Cause of all Financial Crashes
There are
common denominators in all hyperinflations. Generally government finances reach
a point where large budget deficits cannot be financed by taxes or borrowings.
The choices come down to:
1. Austerity
(with the government cutting back its spending) or
2. By funding
the deficit by creating local currency through the printing press, leading to
the inflation tax.
This is always
a political decision, but the line of least resistance is the printing press.
Cutting government expenditures and laying off bureaucratic
staff is anathema to most politicians.
Current
economic activity is strongly supported by remittances from Zimbabwean migrants
to their families in
Credit
financing activities are starting to revive. Visa credit cards are once again
operating successfully in
In a country
with no debt, only assets, people and companies are under geared. With the
ultra cautious lending policies of the banks, there is a huge opportunity for
foreign investors in the credit purveying industry.
There has been
a sharp rise in economic activity since February. Real wages have risen
substantially compared to a year ago. Whatever workers were paid in Zimbabwe
Dollars during the hyperinflation bought virtually nothing. Now even the
minimum wage of around $100 per month allows for basic purchases. A 10kg bag of
maize meal, a staple in the local diet, costs $3.50 and lasts for two weeks.
Demand for products and services are increasing rapidly. Corporate profits are
rising, leading to greater tax revenues for the Government, augmented by rising
VAT taxes. Greater Government revenue allows for greater Government spending.
This
self-reinforcing loop will continue. The improvement in the economy will become
dramatic once Mugabe leaves the scene. At that time aid agencies, NGOs,
Charities and foreign governments will start injecting large volumes of funds
and assistance into the country. They refuse to commit any meaningful funds
while Mugabe is still the President.
With Mugabe out
of the way and the economy recovering strongly, one could reasonably anticipate
that a large proportion of the Zimbabweans living overseas will return to the
country bringing welcome skills and capital. Indeed foreigners will also be
attracted to investing in the country in those circumstances.
It is fascinating to see how rapidly the economy is
recovering. It is a great testament to what can be achieved in a free
enterprise environment by the elimination of controls combined with the
institution of new money that people trust. It needs to be money that their
Government cannot create via the printing (or electronic) press.
The economic
future of
COMMENTS and
CONCLUSIONS
Having seen the
impact of hyperinflation at close quarters, my view is that this is the least
desirable method for eliminating excessive debt. The population has been
traumatized physically (starvation), mentally and financially. Most people did
not have foreign assets or local tangible assets, so lost virtually everything.
The companies survived using unusual skills, ignoring laws and protecting
working capital by holding foreign currency or purchasing equities.
The alternative option for eliminating excessive
debt is to take the tough political decision of allowing 'too big to fail'
companies to fail and accept the unpleasant economic consequences.
Excessive Government spending should be curbed. A
sound currency, elimination of all rules and controls in a completely free
market will produce a much better result in the long term. If this option were
adopted, the short term would likely be extremely unpleasant, possibly
including an economic depression. It is doubtful whether any Government today
has the courage to take this route. Sadly this implies that the world is headed
down the path of currency destruction that will eventually result in a
Zimbabwean situation for the elimination of debt.
Zimbabwe may yet prove to be a role model,
demonstrating how rapidly a country can recover from the devastation of
hyperinflation and the elimination of debt.
In
On mining, the
MDC are examining a bill that will require concessions to be developed in a
shorter period, perhaps 2-3 years, compared to 100 years currently. They will
aim at a combination of royalties and taxes to provide the State's share of
mining profits rather than insisting on a percentage of local ownership.
PERSONAL
NOTE
My family was
concerned about me going to
We arrived late
on a Saturday evening and due to the massive time change, I woke very early on
Sunday morning. I decided to take a walk around central
Standing room only at four
consecutive Masses at the Harare Catholic Cathedral
The people were
well dressed and looked well nourished. They were all friendly and affable. My
view that
All my
preconceived ideas about
Anyone looking
for a safe, interesting, place to visit should consider
10
Nov, 2009
Alf Field
Comments
may be directed to the author at: ajfield@attglobal.net
Disclosure and Disclaimer Statement: In the interest of full disclosure, the author advises
that he is not a disinterested party in that he has personal investments gold
and silver bullion, gold and silver mining shares as well as in base metal and
energy companies. The author's objective in writing this article is to interest
potential investors in this subject to the point where they are encouraged to
conduct their own further diligent research. Neither the information nor the
opinions expressed should be construed as a solicitation to buy or sell any
stock, currency or commodity. Investors are recommended to obtain the advice of
a qualified investment advisor before entering into any transactions. The
author has neither been paid nor received any other inducement to write this article.
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