Hyper Inflation in Zimbabwe

Readers Question: If inflation is too much money, too few goods then how come…..Zimbabwe has the world’s highest inflation rate, at more than 100,000%, and just one adult in five is believed to have a regular job? With no job, no money so no demand so…why inflation?

A likely explanation for the situation in Zimbabwe could be the government printing money in response to a shortage of output, and thereby increasing the money supply much faster than Real GDP.

A few years ago, national debt in Zimbabwe increased to over 100% of GDP. To finance the National Debt, the Government started printing money; but, this only devalued the value of existing money and caused prices to rise.

The inflation is also exacerbated by a shortage of supply. Because basic goods are in short supply it is easy for market prices to be increased causing a spiral effect of upwardly rising prices.

Ironically, this shortage of supply has been made worse by the imposition of price controls. These fix prices for basic goods. But, because the cost of production has been increasing faster than prices, suppliers have little incentive to supply (at least to official channels). This makes the shortage worse and therefore the likelihood of inflation stronger.

  • Note: I think that there is ‘weak demand’ rather than ‘no demand’ Some people still have the ability to buy goods; the problem is that the supply of goods is still less than the very ‘weak’ demand.
  • Also, the thing here is that there is little ‘effective demand’. i.e. people want to purchase goods, they just don’t have the necessary income to be able to do it. Leading to tragic consequences such as Funeral Costs soar

Inflation Rates in Zimbabwe

  • 2005 – 585.84%
  • 2006 – 1,281.11%
  • 2007 – 66,212.3%
  • 2008 – 231,150,888.87%

Causes of Inflation MV=PY

The Monetarist explanation of inflation is that prices are linked to growth in the Money Supply.  The quantity theory of Money states MV=PY. If we assume a constant V (velocity of circulation) and Constant Y, an increase in the Money supply leads to an increase in prices. In practise, the link between the money supply and inflation is not as simplistic as this formula states; but, as a rough rule of thumb if the money supply increases by 1000% and Real GDP stays the same you can expect inflation of around 1000%

Mugabe’s Explanation of Inflation

I believe Mugabe once blamed inflation on ‘Greedy businesses’ demanding price rises. This encouraged him to set up price controls. But, as mentioned these have been ineffective in preventing inflation.

Other Mugabe supporters have tried to blame the inflation as a ‘Western Import’. Although this assertion is rather bizarre given that inflation is relatively low in Western economies.

Hyperinflation and Exchange Rate

Hyperinflation causes a rapid decline in the value of a currency. This graph shows how inflation in Zimbabwe led to a steep decline in the value of the Zimbabwe currency.

Question related to hyperinflation in Zimbabwe

Readers Question: I do not understand the responses. If prices are rising by 1000% and unemployment is 80% then WHO is buying the goods? It cannot be the people unemployed as they would not have the money. If the answer is ‘no-one is buying the goods, hence starvation’ then why would prices be so high as if there’s no demand….

Usually in the West, inflation is caused during periods of rapid growth; it is termed demand pull inflation. However, this particular case of inflation is not caused by an economic boom, but, a collapse in the economy where the money supply is growing despite a fall in output and number of goods available.

Although unemployment is close to 80%, there are still people with money. There are many groups of workers who have rising nominal wages because the government is printing more money, but, because the output of goods is falling, the value of money is decreasing rapidly.

Basically, even if only a small % of the population has any money that is sufficient to cause inflation, if the output is falling. The real problem is that many people have more cash / money, but have declining real incomes.

Because there is a shortage of goods and the printing of more money it is inevitable that inflation occurs.

Note printing money does nothing to increase Real output, Real GDP. It is a basic economic paradox that you can’t get richer by printing more money. But, it doesn’t stop people in desperate situations trying.

16 thoughts on “Hyper Inflation in Zimbabwe

  1. One cause is corruption:

    http://www.newzimbabwe.com/pages/inflation181.17413.html

    Also:

    “The IMF has said however that the principal causes of inflation, chiefly reckless state spending, arbitrary government controls and the flight of foreign investment remain unchanged”

    http://www.newzimbabwe.com/pages/inflation13.11637.html

    Printing money

    http://en.wikipedia.org/wiki/Hyperinflation#Zimbabwe.2C_2000s

    Government spending

    http://www.zimbabwesituation.com/jul31a_2003.html#link16

  2. I do not understand the responses. If prices are rising by 1000% and unemployment is 80% then WHO is buying the goods? It cannot be the people unemployed as they would not have the money. If the answer is ‘no-one is buying the goods, hence starvation’ then why would prices be so high as if there’s no demand….

  3. Pingback: Food and Petrol Inflation in UK — Economics Blog
    1. It’s been going full steam the last fifty years.

      We seem to keep crashing as the dollar loses it’s value.

      About a two years ago I watched the devaluation peak. Silver was a about $40.00 and ounce. Stocks and other commodities way up. We seemed to hit a ceiling where the dollar just wasn’t worth working for. We had lots of layoffs and hours were cut. The morning commute here was cut way back. I think all of the hardship caused a lot of people to file bankruptcy and default on their loans. That in turn cause lots of currency on the books to evaporate and the dollar again regained some value. Just enough to make it profitable to eke out a living and for others to hire some people back.

      I since looked back and could see we seemed to go through the same process when housing crashed and the dot-com bubble burst.

      It is like we are really up against it.

      Until we regain control of the dollar we will never regain control of our government or our country…or globe for that matter.

      Take a gander at this chart and see if it speaks to you.

      http://www.barchart.com/chart.php?sym=%24DOWI&style=technical&template=&p=MO&d=X&sd=05%2F03%2F1970&ed=05%2F03%2F2013&size=L&log=0&t=CANDLE&v=0&g=1&evnt=1&late=1&o1=&o2=&o3=&sh=100&indicators=&addindicator=&submitted=1&fpage=&txtDate=#jump

      To me I’m thinking I can see the crash cycles and some restoring of value in the dollar.

  4. inflation in zimbabwe will continue to rise if the government remains broke. Mugabe’s government has created the situation in the first place. Lets look at this!! Farm invasions=no agro raw materials needed buy Food industry e.g OLIvine, National foods, Dairyboard. It also result in no quality tobacco, cotton and flowers for export=foreign currency, for government imports e.g fuel (OIL) and foreign currency needed by companies to import spare parts and other raw materials e.g BAT tobacco import paper for making cigarrates. Biggest effect was governemnt failing to meet foreign debt repayments. Gono & Bob option print more money sell to black market (Diaspora)=excessive money supply=hyperinflation effect. All this resultedin collapse of formal business sector, production low to zero=Few goods and high demand survival of the ones with Diaspora connections=perpetual increase of prices of scarce goods. All of us know what needs to be done to correct this I dont have to waste my time say it. Even Bob knows. lafaelihle

  5. In response to Tom French, it does not take much demand to create hyperinflation. All it really takes is too many dollars chasing too few goods. The inflation itself makes those who have goods and services charge even more for them in anticipation of the price increasing even further. The twenty-percent who have jobs in Zimbabwe will be trading their dollars as quickly as they can for whatever they can get that holds value or even gives immediate satisfaction. Because it is crazy to save, they will spend money as soon as they can get. Because there is little or no profit to selling goods and services, more and more people with-hold them from the market (or resort to barter), creating even fewer goods. The fact that 80 percent of the population cannot even participate in this inflation does not keep it from happening. In fact, it exacerbates the problem because it only reinforces the belief that anyone would be a fool to ship goods in to sell.

  6. To me the real question is: why is there such a high unemployement rate? Aren’t there roads to build, buildings to fix, research centers to be set up, universities to finance, etc etc etc, in Zimbabwe?

    I don’t think printing money is the issue, I think the issue is not using it to create jobs, hence demand.

  7. No matter how much hard earned money the we the people of the world can put together to build their countries the way they want, there are those that can fire up the fake money presses and print up whatever it takes to dictate their way.

    Maybe this will help make the danger of fiat money clear.

    Imagine you and me are setting across from each other. We create enough money to represent all of the world’s wealth. Each one of us has one SUPER Dollar in front of him.

    You own half of everything and so do I.

    I’m the government though. I get bribed into creating a Central Bank.

    You’re not doing what I want you to be doing so I print up myself eight more SUPER Dollars to manipulate you with.

    All of a sudden your SUPER Dollar only represents one tenth of the wealth of the world!

    That isn’t the only thing though. You need to get busy and get to work because YOU’VE BEEN STIFFED with the bill for the money I PRINTED UP to get YOU TO DO what I WANTED.

    That to me represents what has been happening to the economy, and us, and why so many of our occupations just can’t keep up with the fake money presses.

    http://photos.imageevent.com/stokeybob/followthemoney/Supersingle640x537.jpg

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