Zimbabwe Suffering Yet Again

Zimbabwe, where president Robert Mugabe recently resorted (yet again) to violence to thwart a chance at democracy, is now suffering from hyperinflation. The official figure is 2.2 million percent, but others say it is closer to 12.5 million percent.

Here's my favorite line, from a Newsday article.

"The central bank, overwhelmed by stratospheric inflation..."

Hmm, the central bank is "overwhelmed" by inflation. Let's try a simple syllogism.

1. Inflation is caused by too much money chasing too few goods--i.e., a surplus of money in the economy.

2. Central banks determine how much money is in the economy. Therefore,

3. Central banks control inflation (as Paul Volcker demonstrated so painfully, but so necessarily, in the U.S. in the early 1980s).

But the Zimbabwe bank's response? Print more money, in larger denominations. Here's more evidence they didn't take the right economics courses:

The bank attributed black market inflation to shortages of hard currency that pushed the black market exchange rate to at least 90 billion Zimbabwe dollars for a single U.S. dollar, compared to the official bank exchange of 20 billion to dollar.

Since value is based on relative supply and demand, there's no way in hell that a shortage of hard currency could reduce its value so dramatically. USD1=ZD 90,000,000,000?! The quickest way to reverse that imbalance is not to cut zeros off the currency--the classic but useless response of hyperinflating governments--but to dramatically reduce the number of Zimbabwean dollars in circulation.

The real reason goods are flowing to the black market is not because of a shortage of hard currency, but a sufeit of it. By flowing to the black market, sellers can demand payment in U.S. dollars, a far more stable currency more likely to hold its value. It's not rocket science--if you're a seller of goods, would you rather receive payment in a currency that's likely to still be worth as much tomorrow, or in a currency that's likely to be worth half as much--or less--tomorrow?

And of course the people who suffer from their government's ungodly combination of evil and stupidity are the average citizens, who've done nothing to deserve any of this.

But it could be worse, I suppose. Zimbabwean citizens could be at the mercy of a capitalist system in which Wal Mart comes into their communities and relentlessly drives prices down.