Hyperinflation

What would you do if you had a 100 billion dollars?

Hold your horses. Forgot to mention those 100 billion dollars would be Zimbabwe dollars.

The country has been spiralling in hyperinflation for a long time now. Since the year 2000, the prices have only been shooting upwards and onwards at a crazy rate. As reported by the IMF – “Government figures show Zimbabwe’s peak inflation rate was 79,600,000,000% month-on-month in mid-November 2009.”

So let’s get the jargon out of the way and clear out what the term “Hyperinflation” actually means?

Clearing out the Concept

Hyperinflation is when the economy has excessive money supply afloat, that the price of goods and services just keep rising because- hey the more money you have the more you can pay right? Only, this doesn’t mean the person is necessarily wealthy in monetary terms, because the value of these large amounts of currency, goes down relative to the rest of the world and the country just like that slips into the dreaded state of Hyperinflation.

According to Economics textbooks, the more formal way to define Hyperinflation is when the prices of goods and services increases by more than 50% per month over a period of time.

Causes of hyperinflation

Let’s say the economy of country A is doing poorly and has entered into recession/depression, the central bank naturally wants businesses and people to start spending their money again to prop up consumption and spending to churn the wheels of the economy.

To achieve this, they start printing money, cutting interest rates and encouraging banks to lend more in the hope that people and businesses will utilise this money effectively to consume, spend and invest which will eventually support economic growth. If growth does follow because of this exercise, then it’s a happy story for everybody and the printing of money served it’s purpose!

However, if there’s no economic growth and businesses are still suffering, they prop up prices in an environment where there’s excessive money supply in order to stay afloat; this causes prices of goods and services to rise, people end up paying more for purchasing the same quantity of goods they had bought a month ago, this is the classic case of inflation, well a little positive inflation isn’t necessarily a bad thing. However, if the economy is still under the weather, shows no promise of revival then the central bank prints more to support it, businesses end up increasing prices to keep their shutters open and people pay up. The lack of economic growth leads to a vicious cycle of more money being printed, greater prices, poor economy, printing more money, more money in the economy, greater prices and this precipitates hyperinflation.

How did Zimbabwe get to this state?