Hyperinflation Worries Laid to Rest

Submitted By Michael Michaud

Hyperinflation Worries Laid to Rest, Part I

Many pundits have attributed equity rallies off the March lows to global "fiscal stimulus" packages and “massive, swift action” on the part of central banks, the Federal Reserve first and foremost. Taking it a step further, many people who correctly forecasted the real estate and credit bust say that deficit spending, the Fed’s money printing and U.S. dollar weakness will create hyperinflation in the U.S.

Elliott Wave International's president Robert Prechter carefully laid out his case for deflation as a threat that would likely come before inflation as early as 2002 in his prescient Conquer the Crash (now in second edition). Still, the inflation/deflation argument rages on, and a reader asked recently me to discuss why we aren't worried about hyperinflation.

Let's go back to the June issue of EWI’s Global Market Perspective, where we showed how the situation in the U.S. situation is different from bouts with hyperinflation in Argentina, Mexico and Brazil. Although we continue to look for another deflationary collapse, it also seems reasonable to examine hyperinflation in another nation -- Zimbabwe -- in order to answer a few questions:

1. What really caused the hyperinflationary currency crisis in Zimbabwe?
2. What are the differences between Zimbabwe and the U.S.?
3. Can it happen in the U.S., and if so, what are the signs of its onset?

Zimbabwe’s involvement in the Second Congo War, which began in 1998 and killed 5.4 million people, caused its government to spend billions. Its problems began to spiral out of control shortly thereafter. Following the confiscation and redistribution of land, agricultural output declined by 51% from 2000-2007, which contributed to a rise in unemployment (recently at an unbelievably high 94%).

To undermine the internationally unpopular President, Robert Mugabe, the U.S. passed the "Zimbabwe Democracy and Economic Recovery Act of 2001." This law imposed sanctions and eventually led the International Monetary Fund and financial institutions to abandon Zimbabwe. That loss of the ability to borrow money was the main catalyst of the out-of-control money printing in Zimbabwe. After its 2001 default on IMF loans and suspension of IMF voting rights, the government printed money in an attempt to repay these loans and regain its access to credit. This action failed to turn the tide.

In order to keep the military loyal, Mugabe raised their salaries -- and again, the only way to pay for it was via the printing press. Certainly, Mugabe’s government could have slowed government expenditures after the loss of external creditors, but he would have lost control of the government due to political unrest.

What conditions did Zimbabwe citizens have to deal with? In mid-November 2008, Zimbabwe’s inflation rate hit 79,600,000,000%, which is the equivalent of prices doubling every 24 hours (see the chart below for year-by-year currency values).

To help alleviate this unprecedented hyperinflationary problem, in January 2009, the government legalized commercial foreign currency transactions, formerly a black-market practice. This official “dollarization” of Zimbabwe's economy occurred as conditions improved. Oddly, though, many items are still ridiculously expensive -- for example, a three-bedroom house in Harare goes for $450,000 USD, or baked beans at 50% over the UK price. This situation, however, is due to a supply shortage created by price controls and employment rules that make it difficult to hire or fire workers.

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