Question

Discuss what caused hyperinflation in Zimbabwe and if you think this could happen in The United States.

Answer 1

Causes of hyper-inflation in Zimbabwe

• Government printing money in response to:
  • High national debt
  • Decline in economic output.
  • Decline in export earnings.
  • Price controls which exacerbate shortages.
  • Lack of confidence in government, economy and political life.
  • Expectations of hyperinflation
• In the late 1990s, the Zimbabwe government introduced a series of land reforms. This involved redistributing land from the existing white farmers to black farmers. But, with little experience, the new farmers struggled to produce food, and there was a large fall in food production.
• The economy experienced a sharp fall in output (both agricultural and manufacturing), and this caused a collapse in bank lending.
• The government began increasing the rate at which they were printing money and increasing the money supply. This started with printing money to finance a war in the Congo and also to increase the salaries of officials and soldiers. But, as the economic crises worsened, printing money became a very short-term solution to try and placate people relying on government pay.
• With the economy in decline, government debt increased. To finance the higher debt, the government responded by printing more money, which caused more inflation. Inflation meant bondholders saw a fall in the value of their bonds and so it was hard to sell future debt.
• The economy also experienced many shortages of goods.

Costs of hyper-inflation:

• People couldn’t afford basic goods. Zimbabwe had the worst of both worlds – prices rising faster than wages and incomes. People became “poverty billionaires’ It was no good having a salary of One billion dollars if a loaf of bread cost two billion.
• No credit available. The entire financial system became undermined, banks closed and were unwilling to lend any money. Due to rising prices, the value of debt could be soon wiped out. But, this meant business and individuals had no access to credit. Normal business activity closed down and investment was cut back.
• Menu costs. With inflation almost doubling through the day, anyone who received money had to exchange into foreign currency or spend straight away. Bus commutes were one price in the morning, and much more expensive on the way back. People had to spend time adjusting prices, but more importantly get rid of Zimbabwean currency as soon as you received it.
• Switch to a barter economy. With money becoming worthless, people found ways around the official economy, paying for goods in kind (e.g. using agricultural produce to get a haircut) The problem is the barter economy is only useful if you have goods to exchange. Business increasingly switched to the use of foreign currency – the US dollar as the only way to survive inflation. In 2009, this practice became more widespread.
• Lost savings. Anyone with savings lost everything – unless they were able to exchange with foreign currency. Even people with assets and property often saw the value shrink. Foreign exchange controls make it very hard to take money out of the country.
• Damage to business confidence. The extent of hyperinflation and fall in output disrupted normal economic activity and saw Zimbabwe GDP shrink. It affects investors for a long time.Solving hyperinflation

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.

Solving hyperinflation

The government eventually stopped printing Zimbabwe dollars and normalised the practice of using the US dollar.

NO,  Because the U.S. has a very proactive Fed, and there's such a large amount of historical data from countries that have experienced hyperinflation, we should be able to learn from the past mistakes of others and avoid it.