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Zimbabwe, the most recent poster child of the ravages of hyperinflation, is now in a state of recovery and according to Alf Field, writing at gold-eagle.com,
The world champion of the money printing world, Zimbabwe, is now operating on a quasi gold standard with a largely free enterprise economy. There may be lessons to be learned by other countries from Zimbabwe's experience.
Many countries are struggling with excessive debt, i.e. debt that cannot be repaid out of income. When debt becomes excessive, it can be eliminated by bankruptcy or by an inflationary destruction of the purchasing power of the local currency. Sometimes a combination of these two options is possible.
Zimbabwe 100 trillion dollar bank note. This and $1.95US will get you a latte at Starbucks.
Zimbabwe is now debt free, in fact it's probably the only country in the world to have no debts and is starting with a clean slate. This is because the Central Bank is no longer functioning, the local currency can no longer be produced at will and the politicians, led by the reviled Robert Mugabe are no longer able to cheat the citizens of Zimbabwe.
They are now using gold and U.S. dollars as their currency. Gold provides money that cannot be tampered with by the politicians, so it is trusted by people as a medium of exchange and a store of value. While U.S. dollars (for now) are being used along side gold as currency, there is a quasi-gold standard in full operation, markets are unhindered of government control and the shelves are now stocked with goods for sale.
One of the best descriptions of the cause of hyperinflation,
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 austerity (with the government cutting back its spending) or 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 dispensing with bureaucratic staff is anathema to most politicians.
In Zimbabwe, Robert Mugabe caused his supporters to infiltrate the army and police force. He also used Government finances as a way of funding patronage. His use of the printing press was liberal and nobody was prepared to stand up against him. This eventually led to inflation gathering momentum to the point where the armed forces got rebellious - they wanted more money. When Mugabe caved in to these demands, combined with the selling of freshly created Zimbabwe Dollars for foreign exchange, the Zimbabwe Dollar plunged.
Because money was printed with abandon, those who received the supply of newly printed dollars (Mugabe's supporters and cronies) were able to purchase things the others who had earned their money and saved it could no longer afford to buy with their now worthless money. When things swing to an extreme, they swing back and Zimbabwe is no exception.
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 conclusion of this whole affair is that Governments that fail to take the bitter medicine of economic austerity and opt for the easy path of inflation run the risk of ruin, where all citizens without the means to obtain foreign or tangible assets (i.e. gold) lost virtually everything. Compared to depression, hyperinflation is much worse due to the physical, mental and financial trauma that is sustained. What is remarkable is the healing power of "the invisible hand".
