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Hyperinflation – Zimbabwe (6.5 Sextillion % at peak) Fotos & Video
Hyperinflation in Zimbabwe began shortly after destruction of productive capacity inZimbabwe‘s civil war and confiscation of private farms. During the height of inflation from 2008 to 2009, it was difficult to measure Zimbabwe’s hyperinflation because the government of Zimbabwe stopped filing official inflation statistics. However, Zimbabwe’s peak month of inflation is estimated at 6.5 sextillion percent in mid-November 2008.
In 2009, Zimbabwe abandoned its currency. As of 2013, Zimbabwe still has no national currency; currencies from other countries are used.
On 18 April 1980, the Republic of Zimbabwe was born from the former British colony of Southern Rhodesia. The Rhodesian Dollar was replaced by the Zimbabwe dollar at par value. When Zimbabwe gained independence, the Zimbabwean dollar was more valuable than the US dollar. In its early years, Zimbabwe experienced strong growth and development. Wheat production for non-drought years was proportionally higher than in the past. The tobacco industry was thriving as well. Economic indicators for the country were strong.
From 1991–1996, the Zimbabwean Zanu-PF government of president Robert Mugabe embarked on an Economic Structural Adjustment Programme (ESAP), designed by the IMF and the World Bank, that had serious negative effects on Zimbabwe’s economy. In the late 1990s, the government instituted land reforms intended to redistribute land from white landowners to black farmers to correct the injustices of colonialism. However, many of these farmers had no experience or training in farming. From 1999 to 2009, the country experienced a sharp drop in food production and in all other sectors. The banking sector also collapsed, with farmers unable to obtain loans for capital development. Food output capacity fell 45%, manufacturing output 29% in 2005, 26% in 2006 and 28% in 2007, and unemployment rose to 80%. Life expectancy dropped.
The government blames most of Zimbabwe’s economic woes on economic sanctions imposed by the United States of America and theEuropean Union. These sanctions affect the government of Zimbabwe, and asset freezes and visa denials targeted at 200 specific Zimbabweans closely tied to the Mugabe regime. There are also restrictions placed on trade with Zimbabwe, by both individual businesses and the USTreasury Department’s Office of Foreign Asset Control.
A monetarist view is that a general increase in the prices of things is less a commentary on the worth of those things than on the worth of the money. This has objective and subjective components:
- Objectively, that the money has no firm basis to give it a value.
- Subjectively, that the people holding the money lack confidence in its ability to retain its value.
Crucial to both components is discipline over the creation of additional money. However, the Mugabe government was printing money to finance involvement in the Democratic Republic of the Congo and, in 2000, in the Second Congo War, including higher salaries for army and government officials. Zimbabwe was under-reporting its war spending to the International Monetary Fund by perhaps $22 million a month.
Another motive for excessive money creation has been self-dealing. Transparency International ranks Zimbabwe’s government 134th of 176 in terms of institutionalised corruption. The resulting lack of confidence in government undermines confidence in the future and faith in the currency.
Economic mis-steps by government can create shortages and occupy people with workarounds rather than productivity. Though this harms the economy, it does not necessarily undermine the value of the currency, but may harm confidence in the future. Widespread poverty and violence, including government violence to stifle political opposition, also undermines confidence in the future. Land reform lowered agricultural output, especially in tobacco, which accounted for one-third of Zimbabwe’s foreign-exchange earnings. Manufacturing and mining also declined. An objective reason was, again, that farms were put in the hands of inexperienced people; and subjectively, that the move undermined the security of property.
Government instability and civic unrest were evident in other areas. Zimbabwean troops, trained by North Korean soldiers, conducteda massacre in the 1980s in the southern provinces of Matabeleland and Midlands, though Mugabe’s government cites guerrilla attacks on civilian and state targets. Conflicts between the Ndebele ethnic minority and Mugabe’s majority Shona people have led to many clashes, and there is also unrest between blacks and whites, in which the land reform was a factor. An aspect of this reform that seeks to bar whites from business ownership induced many to leave the country.
(Click Image for larger view)
Lack of confidence in government to practice fiscal restraint feeds on itself. In Zimbabwe, neither the issuance of banknotes of higher denominations nor proclamation of new currency regimes led holders of the currency to expect that the new money would be more stable than the old. Remedies announced by the government never included a believable basis for monetary stability. Thus, one reason the currency continued to lose value, causing hyperinflation, is that so many people expected it to.
Use of foreign currencies
In 2007, the government declared inflation illegal. Anyone who raised the prices for goods and services was subject to arrest. This amounted to a price freeze, which is usually ineffective in halting inflation. Officials arrested numerous corporate executives for changing their prices.
In December 2008, the Central Bank of Zimbabwe licensed around 1,000 shops to deal in foreign currency. Citizens had increasingly been using foreign currency in daily exchanges, as local shops stated fewer prices in Zimbabwe dollars because they needed foreign currency to import foreign goods. Many businesses and street vendors continued to do so without getting the license.
In January 2009, acting Finance Minister Patrick Chinamasa lifted the restriction to use only Zimbabwean dollars. This too acknowledged what many were already doing. Citizens were allowed to use the US dollar, the euro, and the South African rand. However, teachers and civil servants were still being paid in Zimbabwean dollars. Even though their salaries were in the trillions per month, this amounted to around US$1, or half the daily bus fare. The government also used a restriction on bank withdrawals to try to limit the amount of money that was in circulation. It limited cash withdrawals to $Z500,000, which was around US$0.25.
The Black Market
Living with hyperinflation was a challenge for Zimbabweans. Prices in shops and restaurants were still quoted in Zimbabwean dollars, but were adjusted several times a day. Any Zimbabwean dollars acquired needed to be exchanged for foreign currency on the parallel market immediately, or the holder would suffer a significant loss of value. For example, a mini-bus driver charged riders in Zimbabwean dollars, but different rates throughout the day: The evening commute was highest-priced. He sometimes exchanged money three times a day, not in banks but in back office rooms and parking lots.
Such business venues constituted a black market, an arena explicitly outside the law. Transactors could evade the price freezes and the mandate to use Zimbabwean dollars. But black-market transactions are not enforceable under law; moreover, transactors are free to flout any other Zimbabwean law.
The black market served the demand for daily goods such as soap and bread, as grocery stores operating within the law no longer sold items whose prices were strictly controlled, or charged customers more if they were paying in Zimbabwean dollars. At one point, a loaf of bread was $Z550 million in the regular market, when bread was even available; apart from a trip to another country, the black market was the only option for almost all goods, and bread might cost $Z10 billion.
At independence in 1980, the Zimbabwe dollar became the common currency. Originally, the paper notes were Z$20, 10, 5, and 2, and the coins were Z$1, and 50, 20, 10, 5, and 1 cents. As larger bills were needed to pay for menial amounts, the Central Bank of Zimbabwe planned to print and circulate denominations of up to Z$10, 20, 50, and 100 trillion. Announcements of new denominations were increasingly frequent; the Z$200,000,000 bill was announced just days after the printing of the Z$100,000,000 bill.
The government did not attempt to fight inflation with fiscal and monetary policy. In 2006, before hyperinflation reached its peak, the bank announced it would print larger bills to buy foreign currencies. The Reserve Bank printed a Z$21 trillion bill to pay off debts owed to theInternational Monetary Fund.
On three occasions, the Central Bank of Zimbabwe redenominated the currency. First, in August 2006, the Central Bank recalled notes in exchange for new notes with three zeros slashed from the currency. In July 2008, the governor of the Reserve Bank of Zimbabwe,Gideon Gono, announced a new Zimbabwean dollar, this time with 10 zeros removed. The Z$10 billion would be redenominated to be Z$1. This move was not just to slow inflation but also to make computations more manageable.
A third redenomination, producing the “fourth Zimbabwe dollar,” occurred in February 2009, and dropped 12 more zeros from the currency. It was thus worth 10 trillion trillion original dollars, as the three redenominations together reduced the value of an original dollar by 103 * 1010 * 1012 = 1025.
Hyperinflation has been halted within months when government takes the necessary steps. In the meantime, people patronise the black market and informal market for currencies in which they have more confidence.
The most direct solution is a credible promise to stop printing unlimited amounts of money. However, Zimbabwean inflation has lasted for five years and the credibility of any promise is problematic.
Alternatively, the government could declare some foreign currency to be the nation’s official currency. To facilitate commerce, it is less important which currency is adopted than that the government standardise on a single currency. The US dollar, the euro, and the South African rand are candidates; the US dollar has the most credibility and is the most widely traded within Zimbabwe; or Zimbabwe could join the nearby nations of Lesotho, Namibia, South Africa, and Swaziland, which constitute the Common Monetary Area, or “Rand Zone” by formally deciding to use the rand to promote trade and stability.
Short of abandoning the Zimbabwean dollar, Zimbabwe could enact a strict monetary policy. For example, the government would allow the exchange rate to float for a period of perhaps 30 days, so that the market would decide its true value, then declare a fixed exchange rate with the rand and declare the rand a currency simultaneous with the Zimbabwean dollar. The supply of Zimbabwean dollars would be limited, perhaps by a currency board such as in Hong Kong, which has no other constraint than to maintain the fixed exchange rate.
Currently Zimbabwe uses a combination of foreign currencies, but mostly US dollars. A solution has not been decided on as of 2012, and the economy is still in a slump.
*NOTE- China currently does not export any of their gold mining output, hmm why would that be ?
*NOTE – Indian citizens have accumulated more gold reserves than many countries all combined, really… look it up…
Historical Fed Rate Graph – 1925 – 2012
===== Current Update – 2013 – May – 0.25% =====
===== Current Update – 2012 – October – 0.25% =====
Federal funds rate
n the United States, the federal funds rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on anuncollateralized basis. Institutions with surplus balances in their accounts lend those balances to institutions in need of larger balances. The federal funds rate is an important benchmark in financial markets.
The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate.
The federal funds target rate is determined by a meeting of the members of the Federal Open Market Committee which normally occurs eight times a year about seven weeks apart. The committee may also hold additional meetings and implement target rate changes outside of its normal schedule.
The Federal Reserve uses open market operations to influence the supply of money in the U.S. economy to make the federal funds effective rate follow the federal funds target rate. The target value is known as the neutral federal funds rate. At this rate, growth rate of real GDP is stable in relation to Long Run Aggregate Supply at the expected inflation rate.
U.S. banks and thrift institutions are obligated by law to maintain certain levels of reserves, either as reserves with the Fed or as vault cash. The level of these reserves is determined by the outstanding assets and liabilities of each depository institution, as well as by the Fed itself, but is typically 10% of the total value of the bank’s demand accounts (depending on bank size). In the range of $9.3 million to $43.9 million, for transaction deposits (checking accounts, NOWs, and other deposits that can be used to make payments) the reserve requirement in 2007-2008 was 3 percent of the end-of-the-day daily average amount held over a two-week period. Transaction deposits over $43.9 million held at the same depository institution carried a 10 percent reserve requirement.
For example, assume a particular U.S. depository institution, in the normal course of business, issues a loan. This dispenses money and decreases the ratio of bank reserves to money loaned. If its reserve ratio drops below the legally required minimum, it must add to its reserves to remain compliant with Federal Reserve regulations. The bank can borrow the requisite funds from another bank that has a surplus in its account with the Fed. The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate.
The nominal rate is a target set by the governors of the Federal Reserve, which they enforce primarily by open market operations. That nominal rate is almost always what is meant by the media referring to the Federal Reserve “changing interest rates.” The actual Fed funds rate generally lies within a range of that target rate, as the Federal Reserve cannot set an exact value through open market operations.
Another way banks can borrow funds to keep up their required reserves is by taking a loan from the Federal Reserve itself at the discount window. These loans are subject to audit by the Fed, and the discount rate is usually higher than the federal funds rate. Confusion between these two kinds of loans often leads to confusion between the federal funds rate and the discount rate. Another difference is that while the Fed cannot set an exact federal funds rate, it can set a specific discount rate.
The federal funds rate target is decided by the governors at Federal Open Market Committee (FOMC) meetings. The FOMC members will either increase, decrease, or leave the rate unchanged depending on the meeting’s agenda and the economic conditions of the U.S. It is possible to infer the market expectations of the FOMC decisions at future meetings from the Chicago Board of Trade (CBOT) Fed Fundsfutures contracts, and these probabilities are widely reported in the financial media.
Interbank borrowing is essentially a way for banks to quickly raise liquidity. For example, a bank may want to finance a major industrial effort but not have the time to wait for deposits or interest (on loan payments) to come in. In such cases the bank will quickly raise this amount from other banks at an interest rate equal to or higher than the Federal funds rate.
Raising the federal funds rate will dissuade banks from taking out such inter-bank loans, which in turn will make cash that much harder to procure. Conversely, dropping the interest rates will encourage banks to borrow money and therefore invest more freely. Thus this interest rate acts as a regulatory tool to control how freely the US economy operates.
By setting a higher discount rate the Federal Bank discourages banks from requisitioning funds from the Federal Bank, yet positions itself as a lender of last resort.
Comparison with LIBOR
Though the London Interbank Offered Rate (LIBOR) and the federal funds rate are concerned with the same action, i.e. interbank loans, they are distinct from one another, as follows:
- The target federal funds rate is a target interest rate that is set by the FOMC for implementing U.S. monetary policies.
- The (effective) federal funds rate is achieved through open market operations at the Domestic Trading Desk at the Federal Reserve Bank of New York which deals primarily in domestic securities (U.S. Treasury and federal agencies’ securities).
- LIBOR is calculated from prevailing interest rates between highly credit-worthy institutions.
- LIBOR may or may not be used to derive business terms. It is not fixed beforehand and is not meant to have macroeconomic ramifications.
Predictions by the market
Considering the wide impact a change in the federal funds rate can have on the value of the dollar and the amount of lending going to new economic activity, the Federal Reserve is closely watched by the market. The prices of Option contracts on fed funds futures (traded on the Chicago Board of Trade) can be used to infer the market’s expectations of future Fed policy changes. One set of such implied probabilities is published by the Cleveland Fed.
As of December 16, 2008, the most recent change the FOMC has made to the funds target rate is a 75 to 100 basis point cut from 1.0% to a range of zero to 0.25%. According to Jack A. Ablin, chief investment officer at Harris Private Bank, one reason for this unprecedented move of having a range, rather than a specific rate, was because a rate of 0% could have had problematic implications for money market funds, whose fees could then outpace yields. This followed the 50 basis point cut on October 29, 2008, and the unusually large 75 basis point cut made during a special January 22, 2008 meeting, as well as a 50 basis point cut on January 30, 2008, a 75 basis point cut on March 18, 2008, and a 50 basis point cut on October 8, 2008.
Explanation of federal funds rate decisions
When the Federal Open Market Committee wishes to reduce interest rates they will increase the supply of money by buying government securities. When additional supply is added and everything else remains constant, price normally falls. The price here is the interest rate (cost of money) and specifically refers to the Federal Funds Rate. Conversely, when the Committee wishes to increase the Fed Funds Rate, they will instruct the Desk Manager to sell government securities, thereby taking the money they earn on the proceeds of those sales out of circulation and reducing the money supply. When supply is taken away and everything else remains constant, price (or in this case interest rates) will normally rise.
The Federal Reserve has responded to a potential slow-down by lowering the target federal funds rate during recessions and other periods of lower growth. In fact, the Committee’s lowering has recently predated recessions, in order to stimulate the economy and cushion the fall. Reducing the Fed Funds Rate makes money cheaper, allowing an influx of credit in to the economy through all types of loans.
The charts linked below show the relation between S&P 500 and interest rates.
- July 13, 1990 — Sept 4, 1992: 8.00%–3.00% (Includes 1990–1991 recession) rate drop chart rate rise chart
- Feb 1, 1995 — Nov 17, 1998: 6.00–4.75 rate drop chart1 rate drop chart2 rate rise chart
- May 16, 2000 — June 25, 2003: 6.50–1.00 (Includes 2001 recession) rate drop chart1 rate drop chart2 rate rise chart
- June 29, 2006 — (Oct. 29 2008): 5.25–1.00 rate drop chart
- Dec 16, 2008: 0.0–0.25
Bill Gross of PIMCO has suggested that in the past 15 years, every time the fed funds rate was higher than the nominal GDP growth rate, assets such as stocks and/or housing always fell. He even suggested that the best way to price the fed funds rate would be 100 basis points, or 1%, below the nominal GDP growth rate.
Ranks – Top 10 Currency Traders
|3||Barclays Investment Bank||10.95%|
|7||Royal Bank of Scotland||5.86%|
|Rank||Currency||ISO 4217 code
| % daily share
|United States dollar||
|Hong Kong dollar||
|New Zealand dollar||
|South Korean won||