Readers Question: I have a question which confused me for a long time. Recently, Zimbabwe’s central bank decided to delete 12 zeros of their currency to deal with the Hyperinflation problem. I just have an intuition that this action doesn’t work as the purchasing power of the currency remains unchanged. Can you tell me the reason why it doesn’t work?
Thanks!
The inflation rate is the percentage change so if prices double from 16billion to 32 billion, it is the same inflation rate as if prices doubled from 16 million to 32 million.
Knocking zeros off the end doesn’t change the percentage change in prices. Nor does it solve the fundamental imbalances in the economy which caused the inflation in the first place.
It seems Zimbabwe have resorted to using foreign currency as a means of getting past the worst inflation rate in modern times. In other words the Zimbabwe Central Bank has given up on its currency and people are resorting to a mix of foreign currencies.
At its peak the Zimbabwe inflation rate reached 89.7 sextillion per cent (a number expressed with 21 zeroes), 890,700,000,000,000,000,000,000% (If I can count zeros correctly)
Apparently Zimbabwe hawkers are selling the 100 trillion dollar bank notes for $2 as souvenirs to tourists. – I’d probably buy one and use it as a teaching lesson!
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The Zimbabwean government’s dollarization program has stopped inflation and made food prices more constant. The decision to “dollarize” Zimbabwe’s economy, one of the first acts of the new unity government (including erstwhile enemies President Robert Mugabe and Prime Minister Morgan Tsvangirai), has brought a small amount of stability to the economically ruined country. All civil servants now earn a monthly salary of U.S. $100, while shops and banks accept dollars and rands.