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February 2009 By John Lee, CFA
The (Zimbabwean) Dollar - The Point of No Return
Last week, Zimbabwe slashed 12 zeros from
its currency as hyperinflation continued to erode its value, the
country's central bank announced in late January.
The government instituted price cuts to
arrest inflation. As time went by, it became apparent the forced
price cuts cause bare shelves in shops and many businesses
closing .
"Even in the face of current economic and
political challenges confronting the economy, the Zimbabwe
dollar ought to and must remain the nation's currency, so as to
safeguard our national identity and sovereignty... Our national
currency is a fundamental economic pillar of our sovereignty,"
said Gideon Gono, governor of the Reserve Bank of Zimbabwe .
Gono has sent in the police to arrest
businessmen for failing to reduce their prices. On one occasion,
he personally visited shop owners in Harare to demand they lower
prices. Despite these efforts, inflation in Zimbabwe remains the
world's highest.
"Accordingly, therefore, this monetary
policy statement unveils yet another necessary program of
revaluing our local currency, through the removal of 12 zeros
with immediate effect."
The move means that 1 trillion in Zimbabwe
dollars now will be equivalent to one Zimbabwe dollar.
A selection of Zimbabwe Reserve Bank
bearer cheques printed between July 2007 to July 2008 (now
expired) that illustrate the hyperinflation rate in Zimbabwe .
- Zimbabwe Money supply
(2006-2008)
Gono has printed enormous quantities of
money against the advice of economists, but with full support
from Robert Mugabe. As predicted by the textbook quantity theory
of money, this practice has devalued the Zimbabwean dollar and
caused hyperinflation.
On 16 February 2006, Gideon Gono,
announced that the government had printed ZW$20.5 trillion in
order to buy foreign currency to pay off IMF arrears. In early
May 2006, Zimbabwe 's government announced that they would
produce another ZW$60 trillion. The additional currency was
required to finance the recent 300% salary increase for soldiers
and policemen and 200% increase for other civil servants.
The money was not budgeted for the current fiscal year, and
the government did not say where it would come from. On
29 May, Reserve Bank officials told IRIN that plans to print
about ZW$60 trillion (about US$592.9 million at official rates)
were briefly delayed after the government failed to secure
foreign currency to buy ink and special paper for printing
money.
In late August 2006, 3 zeros were chopped
off the old currency to form the new dollar. I t was reported
that about ZW$10 trillion old dollars (22% of the money supply)
had not been exchanged for revalued dollars.
On 27 June 2007, it was announced that
central bank governor Gideon Gono had been ordered by President
Robert Mugabe to print an additional ZWD$1 trillion to cater for
civil servants' and soldiers' salaries that were hiked by 600%
and 900% respectively.
On 28 July 2007, it was reported that
Mugabe has said that Zimbabwe will go on printing
money if there is not enough for underfunded municipal projects
.
On 3 September 2007, it was reported that
that the black market in Zimbabwe is once again booming despite
price controls. People who previously were employed for a paltry
US$11 (ZW$2 Million) a month are now able to turn as much as
US$166 (ZW$30 Million) just through black market trading.
On 24 November 2007, it was reported that
money supply was now $58 trillion revalued Zimbabwean dollars (ZWD)
($41 million US at parallel rates). However, Zimbabwe banks
could only account for $1 to $2 trillion of those dollars,
meaning that members of the public were holding $56 to $57
trillion in cash.
On 4 January 2008, it was reported that
money supply had been increased by $33 trillion (to $100
trillion) revalued Zimbabwean dollars (ZWD) .
On 21 January 2008, it was reported, by
Gideon Gono, that the money supply had been increased to ZW$170
trillion since the middle of December. Further, Gono expected it
to reach $800 trillion by 28 January 2008.
On 1 March 2008, it was reported that
documents obtained by The Sunday Times show the Munich
company Giesecke & Devrient (G&D) was receiving more than
€500,000 (£382,000) a week for delivering bank notes at the
astonishing rate of Z$170 trillion a week.
"The regime is surviving by
printing money," said Martin Rupiya, professor of war and
security studies at the University of Zimbabwe . "At this stage
there is no other way."
On July 1, 2008, Giesecke & Devrient
decided they would no longer print bank notes for Zimbabwe ,
bowing to pressure from the German government.
In the Guardian , on 18 July 2008, a
report on Zimbabwe 's inflation, said that an egg costs ZW$50
billion (GBP 0.17, USD 0.32) . It also showed a monthly war
pension currently is ZW$109 billion (GBP 0.37, USD 0.74), shops
can only cash cheques if the customer writes double the amount,
because the cost will go up by the time the cheque has cleared,
and people can only withdraw a maximum of ZW$100 billion from
cashpoints .
Zimbabwe 's $100 billion banknote with the
number of eggs it could purchase on its release date
On 23 July 2008, an Austro - Hungarian
company based in Vienna confirmed that it is providing the
Reserve Bank of Zimbabwe with the licences and software required
to design and print Zimbabwe currency.
On 24 July 2008, the Reserve Bank of
Zimbabwe announced that "appropriate measures are being put in
place to address the current setbacks being faced on the
currency front, as well as on financial and accounting systems."
It promised that in "the next few days" it would institute
changes to the minimum cash withdrawal limits and IT systems'
constraints. Currently, the government limits cash withdrawals
to ZW$100 billion per day, which is less than the cost of a loaf
of bread. IT systems cannot handle such large numbers; the
automated teller machines for one major bank give a "data
overflow error" and freeze customers attempt to withdraw money
with so many zeros. That same day, the Institute of Commercial
Management reported that ZW$1.2 trillion is worth the same as
one British pound.
From January to December 2008, the money
supply growth rose from 81,143 percent to 658 billion percent.
Critics have noted that most of Gono's
monetary policy statements in the past have had biblical
references. Notably, he usually ends in policy statements to the
Parliament of Zimbabwe thus: "In the Lord's hands, I commit this
Monetary Policy Framework for our economic turnaround."
What does this have to do with the
US Dollar?
The US dollar has several forces going
against it.
1)
Financial Bailout
In the last 5 months, the Federal reserve
has printed over $1 trillion to buy out soured mortgage assets
from private enterprises.
http://www.federalreserve.gov/releases/h41/Current/
(The cut off for the chart below is
October 2008 at $1.5 trillion , today the figure stands at $1.8
trillion )
AMLF: Asset backed commercial paper (ABCP)
Money market mutual fund (MMMF) Liquidity Facility
PDCF: Primary Dealer Credit Facility
(Expanded Greatly)
AIG: AIG bailout
TAF: Term Auction Facility (Bail out for
Banks, and GSE's with bad assets)
To legitimize the process , the Fed puts
- the toxic mortgage notes it bought as
"assets",
- the money it created out of thin air and deposited at
Goldman's account as "liability"
I am not sure which of this qualifies as
"assets". And we are not finished yet as the new banking rescue
program from Treasury Secretary Geithner is to be unveiled
shortly. I wish I am an institution so I can sell to the Fed, my
penny stocks for $thousands which I originally bought for .
2) Fiscal Stimulus:
President Obama $838 billion stimulus
package passed the senate this week .
The money was not budgeted for the
current fiscal year, and the government did not say where it
would come from. The country will go on printing money if there
is not enough for underfunded municipal projects and entitlement
. The regime is surviving by
printing money . At this stage there is no other way.
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