A note on hyperinflation in Zimbabwe

[Beet]

The following table describes the rate of inflation in Zimbabwe:

1980 7%
1981 14%
1982 15%
1983 19%
1984 10%
1985 10%
1986 15%
1987 10%
1988 8%
1989 14%
1990 17%
1991 48%
1992 40%
1993 20%
1994 25%
1995 28%
1996 16%
1997 20%
1998 48%
1999 56.9%
2000 55.22%
2001 112.1%
2002 198.93%
2003 598.75%
2004 132.75%
2005 585.84%
2006 1,281.11%
2007 66,212.3%
2008 231,150,888.87%

http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe

What I see from this is a simple story of expectations. The nation of Zimbabwe is only 30 years old. It started off with a high inflation rate, 7%, in 1980, which no advanced country has seen since the 1970s. It quickly accelerated to 19% in 1983, then drifted back down to 8% in 1988, but never quite back to its starting rate. It then surged to 48% in 1991, or more than twice its previous high, before falling back to 16% in 1996, and never quite back to the 1980s level. It then rose to 55% again in 2000; at this point is began a steady upward trend that finally culminated in hyperinflation.

In short, this sole modern example of hyperinflation was a process built up over sustained high inflation lasting more than 20 years and the entire history of the nation. It is by no means a model for the present European, Japanese or US deflationary economies.

[k-onmmunist]

Good point. People who think hyperinflation could happen in the West in present circumstances are rather foolish to say the least.

[opebo]

The nation of Zimbabwe ... started off with a high inflation rate, 7%, in 1980, which no advanced country has seen since the 1970s.

7% is not 'high inflation', and particuarly not so for a small developing country.  In fact, given that 1980 and the late seventies were higher inflation years for the world as a whole (the US inflation rate was 13.58% that year), 7% is astoundingly low for Zimbabwe.

 

[Verily]

I'm not quite sure that it is reasonable to say that hyperinflation in Zimbabwe was the result of such a prolonged inflation problem. Rather, it was caused by extraordinarily disastrous government policies--policies of the kind that no sane, informed leadership would ever even consider imposing. There is no risk at all of such policies ever taking hold in any developed country, at least partially because every developed country to some extent delegates its policy power in a way that a dictatorship does not.

Even if someone bent on causing hyperinflation became the President or Prime Minister of a Western democracy, he or she would be unable to do so because the bureaucracy would resist hyperinflationary policies.

[ag]

If 7% where sufficiently out of the line to inexhorably lead to hyperinflation, we'd have right now, at least, 100 Zimbabwes in the world, probably more. Your "simple expectations story" completely fails to explain, why that hasn't happened, so it's not an explanation of anything.

The correct explanation, in fact, is much simpler. The gov't completely destroyed its revenue-generating capacity, but had to pay its goons.  As it had no other way of taxing the population (legal economic activity was grinding to a halt because of its own policies), it chose the one and only taxation device left to it: seignorage. It (being in the control of the Central Bank) started printing money like mad. This money was used to pay the goons. As long as the governmetn could maintain itself a step ahead of the inflationary expectations of the populace, the goons could be kept satisfied: they were the first to get the money, so they could spend it before the prices reacted making the cash worthless. This, of course, worked like a tax on everybody else: people taking as payment in exchange for real goodies and/or their own labor pieces of paper that were soon not worth anything. The gov't tried to stay ahead in the race, printing cash in order to strip people of their wealth (which was thus transferred to the goons).

All very simple, as long it ran: except that eventually nobody was willing to take the used toilet paper w/ all those zeroes on it. In any case, the cause of the problem is not anything about expectations and not the 7% inflation along the route, but the rest of the gov't economic policies that led to its inability to collect revenue. The hyperinflation is just a symptom, the disease had nothing to do w/ money per se.

[ag]

The nation of Zimbabwe ... started off with a high inflation rate, 7%, in 1980, which no advanced country has seen since the 1970s.

7% is not 'high inflation', and particuarly not so for a small developing country.  In fact, given that 1980 and the late seventies were higher inflation years for the world as a whole (the US inflation rate was 13.58% that year), 7% is astoundingly low for Zimbabwe.
 

I am impressed: you made an entirely sensible point on this board. It's about the third time that I am happy to wholeheartedly agree w/ you in public, and the first time it's about economics, I think )

[Beet]

If 7% where sufficiently out of the line to inexhorably lead to hyperinflation, we'd have right now, at least, 100 Zimbabwes in the world, probably more. Your "simple expectations story" completely fails to explain, why that hasn't happened, so it's not an explanation of anything.

The correct explanation, in fact, is much simpler. The gov't completely destroyed its revenue-generating capacity, but had to pay its goons.  As it had no other way of taxing the population (legal economic activity was grinding to a halt because of its own policies), it chose the one and only taxation device left to it: seignorage. It (being in the control of the Central Bank) started printing money like mad. This money was used to pay the goons. As long as the governmetn could maintain itself a step ahead of the inflationary expectations of the populace, the goons could be kept satisfied: they were the first to get the money, so they could spend it before the prices reacted making the cash worthless. This, of course, worked like a tax on everybody else: people taking as payment in exchange for real goodies and/or their own labor pieces of paper that were soon not worth anything. The gov't tried to stay ahead in the race, printing cash in order to strip people of their wealth (which was thus transferred to the goons).

All very simple, as long it ran: except that eventually nobody was willing to take the used toilet paper w/ all those zeroes on it. In any case, the cause of the problem is not anything about expectations and not the 7% inflation along the route, but the rest of the gov't economic policies that led to its inability to collect revenue. The hyperinflation is just a symptom, the disease had nothing to do w/ money per se.

Um, my story begins in 1980, it doesn't end there. Expectations can't get built up over one year. It was only after two decades of the government failing to control inflation and inflation rising in the long run, that faith and will to fight it was eventually lost. That is the story. I don't object to you disagreeing with me or even proving me wrong, but I do object to you flippantly mischaracterizing my argument.

While your explanation may explain the mechanics of hyperinflation, it is just another way of looking at the same thing.

The larger point of this whole thing, really, is that if the ECB buys some bonds tommorrow it doesn't mean hyperinflation.

[○∙◄☻¥tπ[╪AV┼cVê└]

The Hungarian Pengo had over 1000000000000000% in just 2 months.

[ag]

While your explanation may explain the mechanics of hyperinflation, it is just another way of looking at the same thing.

The larger point of this whole thing, really, is that if the ECB buys some bonds tommorrow it doesn't mean hyperinflation.

Let me translate what you've written. "The reason it rains is because drops of water fall from the sky. The larger point is that if you boil a kettle tomorrow it doesn't mean a hurricane". A bunch of platitudes that are in no relation to the moronic point you are unsuccessfully trying to disprove

[ag]

While your explanation may explain the mechanics of hyperinflation, it is just another way of looking at the same thing.

The larger point of this whole thing, really, is that if the ECB buys some bonds tommorrow it doesn't mean hyperinflation.

More seriously: of course, anyone who's suggesting that the are about to experience hyperinflation in Europe is crying wolf without much of a cause. However, whatever you are trying to say about Zimbabwe is absolutely unrelated to that. In fact, the first, well, about 20 years in your table are absolutely and truly irrelevant to what has happened. If you start printing money the way the Zimbabwean gov't started doing it, you will get hyperinflation pretty quickly. Nobody is suggesting that ECB is about to do that. It is not unlikely that reckless monetary policy might cause higher inflation than now, but the reason Europe is not about to see Zimbabwean numbers is, well, that it is not Zimbabwe: it is a completely different set of institutions, independent European Central Bank, well-developed property rights, etc., etc., etc.  Print money, while killing off production, and you will get hyperinflation. Don't do that, and you won't. It is THAT simple.

To get Zimbabwe to 2000000% from 50% required about the same "heroic" effort on the part of the regime, as it would be to get it there from 0%. May be, it wold have taken an extra year, I don't know. In the end, if you really want to screw your country (as Mugabe did), it's not very hard and doesn't require a lot of time. Humanity is prone to pretty fast degeneration. But European leaders are no Mugabe and European institutions are not Zimbabwean. Let's relax a bit.

Anyway, let's stop to give non-explanations to non-events.

[Beet]

While your explanation may explain the mechanics of hyperinflation, it is just another way of looking at the same thing.

The larger point of this whole thing, really, is that if the ECB buys some bonds tommorrow it doesn't mean hyperinflation.

Let me translate what you've written. "The reason it rains is because drops of water fall from the sky. The larger point is that if you boil a kettle tomorrow it doesn't mean a hurricane". A bunch of platitudes that are in no relation to the moronic point you are unsuccessfully trying to disprove

You already tried to translate what I wrote, and your first translation, that I was only considering 1980 and arguing that 7% inflation by itself necessarily led to hyperinflation, was wrong. It was also a gross misinterpretation of my point that could have been fixed by reading what I wrote past the first half-sentence.

You also agreed to opebo's point that 7% inflation is not high, which is wrong, because if you ask any central  bank out there, they will say that 7% inflation would be horrific and well outside their target. The fact that OECD nations had higher than 7% inflation in 1980 only shows that OECD nations are not immune from high inflation.

Now you have made a second attempt, and it is nothing but a tautological absurdity that rests on accepting prima facie that your comparison is valid. In other words, you assume that my argument takes that form because you assume it. You have not tried to show, that expectations about past inflation do not affect future inflation, or that a government's success or failure in keeping inflation in check over a period of time is not a good predictor of its future ability or will to do so.

***

Now, in response to your "serious" post, I disagree that the previous 20 years' history is not relevant to the likelihood of hyperinflation at the present. If you have two governments, government A and government B, and you know that both of them are about to begin a new program of expanded quantitative easing, but that government A, since the inception of its independence 20 years ago, has presided over double-digit and steadily increasing inflation up to 50% per annum, whereas government B is currently presiding over deflation and has presided of inflation averaging no more than 3% per annum in the past 20 years, do you really think that this history has no effect? You have not shown that it has no effect; in fact you seem to acknowledge that government B, even if equally determined, would take longer in generating hyperinflation. But the point is that government B is not going to be equally determined, and a reasonably good inference can be made about this by looking at the history of government B.

Finally, I find it amusing that you characterize a point 'moronic' which you agreed to in the same post. If you must know, I encountered a person this very day who was convinced that a ECB bond buying program would turn Europe into Zimbabwe, and that was the very inspiration for this post. So the point is both true and non-trivial, the two criteria for a good point.

Anyway, let's stop dismissing arguments out of hand.

[Free Trade is managed by the invisible hand.]

inflation is not inherently evil but unexpected inflation may have that inherent quality.

[ag]

inflation is not inherently evil but unexpected inflation may have that inherent quality.

This may be true about inflation. But it is emphatically not true about hyperinflation: it is evil even when expected

[ag]

Finally, I find it amusing that you characterize a point 'moronic' which you agreed to in the same post. If you must know, I encountered a person this very day who was convinced that a ECB bond buying program would turn Europe into Zimbabwe, and that was the very inspiration for this post. So the point is both true and non-trivial, the two criteria for a good point.

Anyway, let's stop dismissing arguments out of hand.

I've never agreed w/ the ridiculous statement you are arguing against: here we are on the same page I just think you argument is not an argument at all (I can't even say, it's entirely wrong: it's just vacuous).

7% inflation is not that rare in developing countries, in most of them it would have been considered low, and in 1980 it wasn't that rare even in the developed ones either. Yes, 40% inflation is high, but it does not in any sense lead to hyperinflation. In fact, if we take it to be expected (as you yourself argue), there is no reason for it to be unstable at all. You might say, this is one aspect in which Zimbabwe is not EU: I agree, but that point is beyond obvious, of course.  The reason Zimbabwe got hyperinflation is in the ruinous policies of the Mugabe gov't. You can get to hyperinflation without previous inflationary history, it's not that difficult to do, if you really want to

Finally, don't worry about the "good/bad topic". I am not talking to you here as a moderator (as a moderator, I think it is fully appropriate for the board: good post). But as another board member, who happens to be an econ professor, I find the entire discussion more than a bit amusing )))))

[Beet]

Finally, I find it amusing that you characterize a point 'moronic' which you agreed to in the same post. If you must know, I encountered a person this very day who was convinced that a ECB bond buying program would turn Europe into Zimbabwe, and that was the very inspiration for this post. So the point is both true and non-trivial, the two criteria for a good point.

Anyway, let's stop dismissing arguments out of hand.

I've never agreed w/ the ridiculous statement you are arguing against: here we are on the same page I just think you argument is not an argument at all (I can't even say, it's entirely wrong: it's just vacuous).

7% inflation is not that rare in developing countries, in most of them it would have been considered low, and in 1980 it wasn't that rare even in the developed ones either. Yes, 40% inflation is high, but it does not in any sense lead to hyperinflation. In fact, if we take it to be expected (as you yourself argue), there is no reason for it to be unstable at all. You might say, this is one aspect in which Zimbabwe is not EU: I agree, but that point is beyond obvious, of course.  The reason Zimbabwe got hyperinflation is in the ruinous policies of the Mugabe gov't. You can get to hyperinflation without previous inflationary history, it's not that difficult to do, if you really want to

Finally, don't worry about the "good/bad topic". I am not talking to you here as a moderator (as a moderator, I think it is fully appropriate for the board: good post). But as another board member, who happens to be an econ professor, I find the entire discussion more than a bit amusing )))))

Well then I will just say that I never argued that it is physically impossible not to achieve hyperinflation if there was not previous high inflation. Again, it's a misinterpretation of the point. But I still don't see how you get to previous record tells us nothing about the likelihood of the present government being able to control inflation. I seems that would require some empirical evidence. Still, as you say, "[I am an] econ professor", case closed. I will defer to someone who took a more specialized path in life.

[ag]

Finally, I find it amusing that you characterize a point 'moronic' which you agreed to in the same post. If you must know, I encountered a person this very day who was convinced that a ECB bond buying program would turn Europe into Zimbabwe, and that was the very inspiration for this post. So the point is both true and non-trivial, the two criteria for a good point.

Anyway, let's stop dismissing arguments out of hand.

I've never agreed w/ the ridiculous statement you are arguing against: here we are on the same page I just think you argument is not an argument at all (I can't even say, it's entirely wrong: it's just vacuous).

7% inflation is not that rare in developing countries, in most of them it would have been considered low, and in 1980 it wasn't that rare even in the developed ones either. Yes, 40% inflation is high, but it does not in any sense lead to hyperinflation. In fact, if we take it to be expected (as you yourself argue), there is no reason for it to be unstable at all. You might say, this is one aspect in which Zimbabwe is not EU: I agree, but that point is beyond obvious, of course.  The reason Zimbabwe got hyperinflation is in the ruinous policies of the Mugabe gov't. You can get to hyperinflation without previous inflationary history, it's not that difficult to do, if you really want to

Finally, don't worry about the "good/bad topic". I am not talking to you here as a moderator (as a moderator, I think it is fully appropriate for the board: good post). But as another board member, who happens to be an econ professor, I find the entire discussion more than a bit amusing )))))

Well then I will just say that I never argued that it is physically impossible not to achieve hyperinflation if there was not previous high inflation. Again, it's a misinterpretation of the point. But I still don't see how you get to previous record tells us nothing about the likelihood of the present government being able to control inflation. I seems that would require some empirical evidence. Still, as you say, "[I am an] econ professor", case closed. I will defer to someone who took a more specialized path in life.

"Econ professor" was an unfair thing to say, I should have held myself off

The prior record says a lot. However, the prior record is so distinct in EVERY respect, that making this point, in my view, is fully superfluous Are you really only trying to show that Germany and Zimbabwe are different? Well, they are )))))

[Free Trade is managed by the invisible hand.]

inflation is not inherently evil but unexpected inflation may have that inherent quality.

This may be true about inflation. But it is emphatically not true about hyperinflation: it is evil even when expected

hyperinflation is normally unexpected.

[Gustaf]

inflation is not inherently evil but unexpected inflation may have that inherent quality.

This may be true about inflation. But it is emphatically not true about hyperinflation: it is evil even when expected

hyperinflation is normally unexpected.

Not when you're in it. Unless you mean that it is volatile.