Pondering over Hyper Inflation!!
Brief on the what scenario Zimbabwe is in:
Exchange rate: 7.4mZ$ = 1US$, few months ago it was 2mZ$=1US$
People fleeing the country
Ruled by President Mugabe, more of a dictatorship
So why... Infation at whooping 4000%
Am taking top down approach, though views will go right centre left... !!
President Mugabe to check inflation has capped prices on certain commodities, though it goes against the cause. Say, you are a producer -- with factory cost of the produce coming 100$, however the end price is capped at 80$ only (political situation warrant that, u dont have a excuse there), depsite your raw material cost being higher, i.e. business being economically unviable because the domestic currency has depreciated --> Hence you stop producing it, why would one produce something for a loss... automatically the demand is constant and supply going down..... causes Supply constrained inflation ... ... ...(A)
Now, Zimbabwe has not had good history of BOP -- same has been the case in recent past, with most of the bugdetary revenue already spent... a very obvious mismatch... with no funds to support development projects. Also, With the history of bad international payments and not so healthy political relationship, country finds difficult to raise foreign debt....
So, Mr. Mugabe runs his own printing press..... prints more and more local zimb. dollars -- thereby increasing domestic supply, pushing inflation further.. UP... ... ...(B)
So if you are made a zimb. resident, to save ur A**, you would want to sell of what all domestic currency you have now, as u know the same dollar is going to fetch you far less in the future.... Hence all M1 chasing for stable currencies... (i.e., if u buy USD, u got to pay him something in return ie. Zm$ --- hence demand for USD increases, so USD appreciates and domestic currency depreciates further).... so guess thats the reason for people fleeing the country and more supply and more inflation... (C)
So A+B+C causes HYper INflation !! ~ Hence root cause for the A+B+C, being Poor governance --> BOP going for toss --> no Foreign Debt available --> Print More money... (dictatorship at its best) !! --> Hyper Inflation :)
So this explains the causes for hyper inflation...at 4000 levels,... however there are a few doubts in above discussion... 1. if u know the currency is to depreciate further, who fool would buy it (or exchange it for) 2. there has to be some rationale in the limits of printing dometic currency (say Gold reserves, Country reserves, SDR, etc. etc....)
Looking for comments/corrections/.... :)
"All views expressed are personal"
Subscribe to:
Post Comments (Atom)
3 comments:
Excellent summary.
Bad politics leading to sliding economy. Zimbabwe has been reeling for sometime. It attained 4000% somewhere last year with 2007 levels at 66000%.
Top it up with a grim unemployment rate of 80%. May you want to research on the effects of unemployment rate,production curve,wanton printing of notes to 'fund' projects,sanctions and link it up to inflation.
If I were to raise my specs and look at finer deatils of what has happened to Zim lately, I would say I am in agreement with the A+B+C theory of ur's.
However, I would also like to add on to the explaination..
When Mugabe ordered freeze of prices for milk, bread, coking oil and other essential commodities to stem the run-away prices little did he know that this would lead to a parallel economy and black marketing of these commodities...
Also, because of the seizure of white farms by Mugabe, the state of agriculture in the country is really bad ... (lack of adequate plantation)..
And now the explaination to the question's u raised...
1. Zim is no longer following the UN code of conduct on printing of currencies and yes in a dictatorship u can print as much as u want...
2. Printing of dollars is helps if one looks at it thoroughly .. even if there is a cap on prices ...in a parallel economy producers will be willing to sell commodities for reasonable profits..alas..atleast people get food !! ..infact prinitng more dollars also helps creating employement as cost of production is recovered easily ... some times excessive money supply can also lead to deflation...what really matters is the 'Velocity' of money... though it may take some time .. Even parallel markets get crowded out !!
No doubt its a vicious cirlce...n its not easy to come out of it .. unless u return to Free Economies."let product determine its own price" ...
Zim problem is different at the moment ..its more of a political problem than an economic one ...
Post a Comment