Pete’s blog

Ever wondered how to get an inflation rate of over 1000% in your country? Ever wanted the price of goods to double every week? Well this handy guide comes to you with the help of good old Uncle Bob. It is actually quite simple and requires only one easy step – everything else just aids the process. Destroy a country’s economy in one easy step? Can’t believe what you just read? Well read this guide to find out how…

Step 1: Create an artificially strong official exchange rate then sit back and wait.

Zimbabwe’s demise sadly was probably just a matter of time. Uncle Bob’s other policies just sped up the inevitable. So how does work?

Say for example the official exchange rate is R1=$10 (using Rands as the one currency and Zim Dollars as the other to avoid $/$ confusion) and the black market exchange rate is R1=$100. This means that you can go to an official exchange place with R1 and they will give you $10, or you can give them $10 and they will give you R1. Now out in the street is a guy who really wants some Rands, because he knows he can go across the border and buy himself more stuff with them then he could with his Zim Dollars. If you give him R1, he will give you $100. Note the currency black market is generally a one way market, they will not sell you Rands for Zim Dollars. Also in this example the differences in exchange rates is quite large, by the time the gap is this large all the other factors I will talk about later are already in full swing. In reality the gap starts small … small but significant.
Quick question, anyone see how they could make money very quickly using this system? If you exchange $10 for R1 at an official place, take that R1 outside and exchange it for $100, you have just made $90 out of nothing. Don’t like Zim Dollars? Change that $100 for R10 at an official place then. Sure this is an obvious loophole, so obvious that any dummy could have spotted it. So Bob says that only official people and people with a legitimate business reason may use the official exchange places.
Guess what. A lot of government officials got rich. Businesses on the other hand now faced a nightmare of red tape if they wanted to change Zim Dollars into Rands for whatever reason. So say you are a business in Zimbabwe and you earn Rands on a deal – are you going to change those Rands into Dollars? Or are you rather going to hold onto them for when you next need them? Plus you have various people taking full advantage of the money creation scheme mentioned earlier and buying up all the Rands in the official coffers.
Guess what. Zimbabwe has a foreign exchange crisis. Now a self-fulfilling death spiral kicks in. Because there is not enough foreign currency, Zimbabwe cannot import foreign goods and local prices sky rocket. Major goods shortages, major fuel shortages (Zimbabwe of course not being an oil producing nation). Inflation starts climbing. People lose faith in the Zim Dollar – keep it too long and it loses its value. If you are worried about your money losing value, what do you do? Buy goods, buy foreign currency. Stores sell out of everything – non-perishables are very valuable because you can keep them a long time and use them to trade for perishables later. The currency black market explodes – people are desperate to buy Rands. Now a guy in the street will give you $1000 for a Rand. Since the gap between the official and black market exchange rate started this mess, any increase in this gap is only going to make it worse. In response the government puts its foot down and starts attempting to shut down the black market and tries to force companies to convert their Rands into Zim Dollars. Of course this only increases the panic and makes things worse. The black market dealers remaining now offer a premium of $10 000 for a Rand. Companies raise their prices – firstly because there aren’t enough goods coming in and secondly because they now have to try and recover the losses they make selling their Rands for $10 each (the official rate). Inflation and more inflation – hyperinflation.
Fortunately Uncle Bob knows exactly what to do and has realised that what is needed is a firm hand. So as you may have heard the latest idea is to fix prices… at half the price what they were… Stores sell out of everything… again… Currency crisis… again… Petrol queues… again! But official inflation is now -100%, well done Bob. (Note that the real effect of this was an attempt to double the value of Dollars overnight). Pity none of the businesses are keen to keep trading if they are forced to make a loss. Don’t worry! Uncle Bob will run their businesses for them… The Soviet Union managed to run a command economy for over half a century, where production and prices were all centrally controlled. Luckily for the Soviet Union they had a vast, almost self-sufficient empire and an iron curtain to separate them from the rest of the world. Unluckily for Uncle Bob, he runs a small land-locked country in Africa… And, oh dear, didn’t he also manage to recently wipe out Zimbabwe’s grain production? Not even self-sufficient in basic foodstuff… No matter how fantastic you and your buddies think you are, you cannot run a command economy in the middle of a free-market. What would be the result? No goods in the official stores and a very flourishing black market. Bartering becomes the standard trade for most people. ‘Luxury’ goods like bread will be paid for in foreign currency. Messina across the border in South Africa is flourishing at the moment with all the Zimbabweans doing their shopping there.
How do you fix this mess? Floating the currency would be a start. Giving the largest black market dealers an official licence might help… Unfortunately confidence in the Zim Dollar is already too low. Would you buy a Zim Dollar? Floating the exchange rate could make things worse before they got better. Everything would have to be unwound slowly and carefully. What is needed is patience, intelligence and a lot of confidence building… Things that Uncle Bob excels at.

And that in a nutshell is how to wreck an economy.