If you paid for dinner with your hundred trillion dollar note, getting change was a problem.
Where are we going? To the beginning and end of Zimbabwe’s hyperinflation.
Zimbabwe’s Hyperinflation
Zimbabwe had seemingly logical solutions to its fiscal and monetary problems. When tax revenue was inadequate, it printed more money. However, more money made too many Zimbabwe dollars chase too few goods and prices soared. Then, assuming (perhaps) that there would be no more inflation if prices could not rise, they created price ceilings. But because production costs exceeded the mandated store prices, supply evaporated.
Meanwhile inflation became hyperinflation. One loaf of bread sold for what 12 cars had cost a decade earlier. People were paying their rent with groceries because no one wanted currency. And since what you had today was worthless tomorrow, no one was saving. But yes, everyone was a billionaire.
For a quick picture of monetary chaos just think of clothes lines. To get just US$1 you needed Z$35 quadrillion. Once you secured some dollars, they might have needed a wash. Worn out, gray and dirty, the small small supply of dollars was in such large demand that people were laundering the bills. On clothes lines you could see them drying.
In November 2008, with Zimbabwe’s inflation rate (below) close to 79 billion percent, it took slightly more than 24.7 hours for prices to double.
The Solution
In 2009, legalizing a multi-currency approach for transactions, the government said taxes had to be paid with foreign exchange. Only now though can we say the end is in sight. Offering to buy back all old Zimbabwe dollars, the government said it would use UN exchange rates but that US$5 was the least that bank accounts could receive.
Our Bottom Line: Inflation
Inflation is really a Goldilocks phenomenon. Economists like to have the inflation rate not too much, not too little but just right. In the U.S. Janet Yellen’s goal is 2 percent.
