Economists: How does this work?

[Bagor]

I spent a bit of time in Zimbabwe in 1996 when the $Zim was approx 18-1 to the $US. Now they're running about with notes like this:



The exchange rate at the moment is about $256bn to one $US. Also the government seems to be adding and taking away zeros at the drop of a hat.

At midnight, my bank stripped me of my trillionaire status - the Z$5 trillion sitting in my account became Z$500.

http://news.bbc.co.uk/2/hi/africa/7535782.stm

And most worrying of all:

In bars, the price of beer goes up between rounds.

http://news.bbc.co.uk/2/hi/africa/7528974.stm

Is this basically a government trying to ignore inflation (15 million %) by printing money and adding zeros at will?

[Ducay]

They are creating the inflation by printing so much money. As they print so much, its value keeps going down and down and down, relative to other currencies. IIRC, this whole bout of super-inflation started when it came to light that the government printed trillions of dollars to payoff int'l loans.

[BlackEleven]

Originally Posted by Ducay

They are creating the inflation by printing so much money. As they print so much, its value keeps going down and down and down, relative to other currencies. IIRC, this whole bout of super-inflation started when it came to light that the government printed trillions of dollars to payoff int'l loans.

Did they not understand the principle of money or did they think no one would find out?

[Boblobla]

Originally Posted by Bagor

Is this basically a government trying to ignore inflation (15 million %) by printing money and adding zeros at will?

Yes. You have people in power who are pretty much completely clueless in an unstable region of the world.

[Bagor]

Originally Posted by BlackEleven

Did they not understand the principle of money or did they think no one would find out?

That's what I was wondering. And what about the people lending the money? Didn't they see this getting out of control?

[The Yen Man]

By doing this, the government is basically paying off debts with its citizen's money. The money people in that country have in the bank basically became worthless overnight. I'm not an economist and even I understand you can't just print money out of the blue to pay off debts. WTH was the government expecting? That somehow no one would find out?

[snowdude]

A bigger factor might be the need of the government to get the seigneurge (sp...sorry i can't spell) off the money. That's the difference between what it costs the government to print the note versus what it is actually worth. So my guess would be that the government is trying to make some money (since tax collection has collapsed) off of printing notes and is then using the resulting seigneurge to buy forigen curreny.

It's a not-insignificant difference in money that can be created, especially if you're printing tons of notes. However, because of the inflatiornary impacts it's not one that actually gets seen very often in the real world.

[Locke]

Originally Posted by BlackEleven

Did they not understand the principle of money or did they think no one would find out?

A little bit of column A and a little bit of column B.....

This strategy has been used many times by many different coutries. Russia still hasnt fully recovered from it, but as I recall, when Germany was forced to pay reparations to France after WWI they just printed off what essentially became worthless money.

Some countries do it because they dont understand simple economics, others do it in hopes it wont be found out and others (Germany in my example) do it to make a point of protest.

Zimbabwe was probably pissed about having to repay international loans, much like Germany was at the time, and in protest just printed the money making it essentially worthless.

The problem there being, if you brint off a few billion/hundred billion/trillion whatever, its going to devalue your whole currency at a pretty staggering rate, not just the money you used to repay loans, but the money you use to buy food. That kinda dough is no drop in the bucket.

Its either that or they're legitimately ######ed.

[badnarik]

Mugabe has destroyed the country by ignoring simple economics. Price controls, taking away private farms, etc.

Fiat currencies are dangerous. The government can tax the citizens by simply printing money.