Much has been written about hyperinflation. However, since most of us have never had to live with it (yet), we really don’t think much of it. Given that Ben Bernanke seems to think that Zimbabwean central banker Gideon Gono was onto something with his plan to print deflation away, it may be useful to look a bit at the hyperinflation that Zimbabwe went through. For the causes of this hyperinflation, see Zimbabwe Part I. As we visited the businesses and bars of Zimbabwe, everyone shared their own experiences with us, so the following is a bit of what living with hyperinflation feels like.
-(A Driver) At first, it started slowly. We didn’t realize what was causing it. Then suddenly, the banks froze our savings in US Dollars and told us we now had Zim dollars. 20 years of savings for my kid’s college was only worth a few beers. We pleaded with the banks to let us have our US Dollars back, but they said a government official had taken the last US Dollars out for his personal account.
-(A Banker) We understood hyperinflation, but what could we do? We’re only allowed to transact in Zim Dollars. After a few years of very high inflation, we stopped making loans. Instead, we invested our capital in real estate. When people realized that real estate protected you from inflation, no one would sell any, so we started parking our capital in cars, refrigerators, basically anything that would still have value by the end of the week. When the inflation finally ended, we had warehouses full of stuff that no bank should ever own. It took nearly a year to sell most of it off and start lending again. Remember, in banking, it’s not the return on your capital that you care about; it’s the RETURN OF YOUR CAPITAL that matters.
-(A Zimbabwe Stock Exchange Trader) People started to realize that shares would keep pace with the inflation so they started storing their money in shares. Trading volume exploded and we had to add a second trading session each day to keep up with the demand of the traders. On good days, shares would go up ten-times. On bad days, things would only double. There were never any down days.
-(A Driver) The good thing about them stealing the white’s land was that they gave me 3 hectares of land for free. Unfortunately, the piece that they gave me didn’t have the white guy’s water well, so I don’t bother with farming it. Do you want to buy the land I got for free? Ohh wait, you’re white. What will you give me for 49% of it?
-(A Stock Broker) We stopped using an index value to keep track of the stock exchange because it didn’t have any meaning any more. Instead, we started quoting the current market cap in Zim Dollars and in US Dollars at the current exchange rate. That way, people could better see if the exchange was keeping up with the inflation that week. Even two years later, we still only quote the market cap in US Dollars of the companies traded on the exchange.
-(A Student) It eventually got so bad that we couldn’t be sure how much the bus ride home would cost. The first thing every morning, I rushed to the shop and bought a loaf of bread. When I wanted to go home in the afternoon, I would trade that loaf of bread for a bus ticket home. The bus ticket might go up two or three times over the course of the day, but it always cost about a loaf of bread.
-(A Business Man) There were fortunes to be made. The exchange rates all over the country were a mess. No one really knew the right prices of anything. You could bribe a bank official to let you borrow in Zim, and buy cars, then trade the cars for Rand in another city and then trade those Rand for televisions in another city. The prices of everything were chaos. All you needed was a cell phone that worked and good friends in each city who kept track of prices.
-(A Stock Broker) No one knew what would store value. Citizens were not legally allowed to own US Dollars, but Old Mutual was a company that had shares listed in Zimbabwe and was dual listed on other exchanges outside of Zimbabwe so it had value. We put all the shares in existence onto 1 share certificates and we used to use these shares as currency for transactions at restaurants. Everyone would accept Old Mutual shares in business because they weren’t allowed to accept US Dollars.
-(A Waiter) We were never sure of the exchange rate, so we would have a chalk board at the restaurant and we’d have to update it every hour or two with the new prices for food. After a while, things got easier because there was no more food left to sell since the government had stolen all the white’s land, and the blacks didn’t bother to farm it, so we just closed the restaurant.
-(A Driver) The only way to get hard currency was to help smuggle diamonds out through the border. Eventually, government officials realized that smuggling must have been the reason that I could afford fuel for my taxi, so they would torment me for corruption money. Some days, I’d have to pay corruption at ten different check points just to make one run from the diamond mines to the border. Eventually, I was paying more in corruption than I was making transporting the diamonds so I stopped doing any work.
-(Fellow Traveler) They rarely have enough US Dollar bills for transactions, but they definitely don’t have any US coins. That lady just made change for me in South African Rand, Malawi Kwacha and Botswana Pula. What am I going to do with all of these coins?
With these vignettes, I’ll leave you with one from Matt Goodman, one of the analysts at my hedge fund who went with me to Zimbabwe.
-(Matt Goodman) The policies of printing money and redistributing wealth, while driving away productive businesses, certainly remind me of a place close to home. I imagine America following a similar path. We have chosen the path of inflation and we will follow it until we find out it does not work. I have no idea how quickly we will figure out that inflation does not solve problems. But once we admit defeat we will have a nasty cleansing of the system that will be remembered as quite the crash. I have no idea whether our policy makers will get to the point of hyperinflation before the point of realization, but it is worrisome that our fed president said in a speech less than 10 years ago that he felt confident he could create inflation in any situation “even if it means dropping dollars from helicopters”. I don’t believe the scale will get even nearly as bad as Zimbabwe. But I do think the underlying principles are quite similar. We will inflate and inflate until the point of realization in which point we’ll crash. Will we push to hyperinflation before realization? I have no idea. But I feel strongly that those with cash and fixed income investments will be the losers. So be careful, because as Hemingway said “it happens gradually and then suddenly”. Gold has survived all similar periods on record, and I expect more of the same this time around. I view it as the best asset to hold as having value in both the inflation and the deflation (crash).
A Trip To The Market….
A quick look at the local fruit and vegetable market in Harare
If you don’t like veggies, there’s plenty of caterpillars….
My vote for the best $1 sadza in Zimbabwe. Note the prices–food is cheap in Zim.
Meanwhile Ronaldos has the happiest workers…. and some nice sausages too (see them on the right)