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.
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
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.)
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.
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
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
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
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
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
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
Alf Field 11 November, 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
and foreign exchange regulations have been abandoned.
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.
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.
economic activity is strongly supported by remittances from Zimbabwean migrants
to their families in
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.
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.
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.
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
preconceived ideas about
for a safe, interesting, place to visit should consider
may be directed to the author at: email@example.com
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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