Zim-style Black Friday credit crisis awaits

ZIMBABWE’s hyperinflation which peaked in 2008 is an excellent example of what happens when nations print money. It is even more of an example of how nations end up printing large amounts of money in the first place.

Philip Haslam Author

Hyperinflation episodes are a regular historical event. There have been 52 documented cases of hyperinflation in the past 100 years — more than one episode every two years. These typically follow similar economic paths, and Zimbabwe’s experience is an excellent template.

Very briefly, here’s how they occur — what we call hyperinflation “storm warnings”. It starts off with a government gorging itself in debt, usually followed by a boom as debt-based spending stimulates an economy.

But as debts begin to grow, a time comes when lenders begin to question whether the government has the ability to repay its debts. A credit crisis follows as the exchange rate crashes and imports become much more expensive.

At this stage, the government is faced with a dilemma. On the one hand, it can stop spending, cut the size of its government operations significantly, reduce imports, increase taxes, retrench a whole lot of people, and allow a painful but necessary depression to realign local spending habits.

On the other hand, the government could continue spending and repay its debts using newly printed money — an option that has limited immediate negative consequences and so is extremely attractive when other options have been exhausted.

But, with the passage of time, the consequences of this option are far more painful. As the supply of money increases, the value of the currency continues to fall further and imports cost more, requiring increased rounds of money printing, which can lead eventually to full-blown hyperinflation.

I went to Zimbabwe to study its hyperinflation and to interview people on the ground. Their stories were heartbreaking yet fascinating — providing critical lessons about debt, money printing and hyperinflation.

After Zimbabwe gained Independence in 1980, the international community welcomed the country into its fold with open arms. Zimbabwe had an almost perfect credit record internationally because of its strong farming and mining sectors, and the World Bank began to lend heavily to the country, helped further by its already sophisticated fractional banking system.

During those years, credit spending began to accelerate. Using borrowed money, the government began to spend extravagantly, making costly social security promises to various special interest groups and committing 15 000 troops to an expensive war in the Democratic Republic of Congo around 1996.

By 1997, the World Bank was in the process of arranging a further US$100m loan facility for the Zimbabwe government when it heard the news of a large national pension expense to be incurred. Within a month, the World Bank suspended its facility pending further detail on how these pensions would be funded.

In response, President Robert Mugabe’s government stopped making debt repayments to the World Bank — in effect, a default.

This suspension of borrowing facilities led to a credit crisis and, on November 14 1997, the Zimbabwe dollar plummeted in value as capital fled the country. Known as Black Friday, the currency lost 75% of its value.

The day was a critical turning point for the nation as the cost of the country’s imports soared overnight.

One woman I interviewed said: “I remember the crash like it was yesterday — it was a Friday morning in the middle of spring. I was sitting at my desk drinking my third cup of coffee when our purchasing manager rushed through to tell me the news. I was in meetings for the rest of the day and he came through five or six times to give updates on how far the currency value had fallen.

“We ran a small business in printing and we imported all our branding and technology to sell locally. Our input costs were based in dollars and the crash practically destroyed our business.

“The exchange rate kept on getting worse and worse. From then on, everything changed. We eventually had to close up shop.”

With international loan funding options drying up, foreign currency became increasingly scarce. As the government responded by printing money to fund its continued expenses, the value of the Zimbabwe dollar began to spiral downwards.

It was not the only market crash. The country would have many subsequent crashes as it spun down a debt and money-printing vortex.

In 2000, the economy experienced a major contraction from its infamous land confiscation and redistribution project. In 2003, it had a major banking crisis. By 2006, all stores had emptied and there were shortages of all goods, including fuel, water and electricity.

The entire make-up of the Zimbabwe society mutated with huge social ramifications. Crisis after crisis followed as money-printing escalated and the currency tumbled towards hyperinflation and its ultimate demise in 2008.

Zimbabwe’s story is interesting in one sense, and foreboding in another. In describing Zimbabwe money-printing, Gideon Gono, the former governor of the Reserve Bank of Zimbabwe, said: “These interventions, which were exactly in the mould of bail-out packages and quantitative easing measures currently instituted in the US and the European Union, were geared at evoking a positive supply response and arrest further economic decline….”

Globally, the major economies are gorging themselves in debt — much more than Zimbabwe ever did. While the 2008 credit crisis was a “Black Friday” event, it has not been significant enough to cause lenders to withdraw lending facilities en masse.

Including social security liabilities, the US owes more than US$100-trillion. Japan has debts exceeding ¥1-quadrillion (equivalent to a billion people owing a million Japanese yen each).

Europe and the UK are not much better off. Each of these regions is increasing their debt with no respite.

Since the 2008 credit crisis, the money-printing measures of these economies have been immense. The US, Japan, England and Europe have since printed a combined more than US$7-trillion and there is no end in sight. As debts continue to grow, a true Zimbabwean-style Black Friday credit crisis awaits.

And as the authorities respond with huge money-printing programmes, hyperinflation in these economies some time in the future becomes a very real possibility.

How does this compare to SA? The amount of money-printing in SA is low at present. SA is, however, on a dangerous path of increasing its debts and running up dangerously high trade deficits.

Total South African government debt excluding social security obligations is R1,55-trillion, equivalent to more than R100 000 owed per household. This excludes about R2,5-trillion in corporate and personal debts, and R0,5-trillion in parastatal debts, which are likely to grow with the major public works spending being planned in the next few years.

SA is on a path of debt growth that cannot be sustained for much longer. We have not yet had a debt crisis that triggers money-printing on a large scale, but the lessons that Zimbabwe provides cannot be ignored.

Haslam is lead author of When Money Destroys Nations, co-authored with Russell Lamberti, on how hyperinflation ruined Zimbabwe.

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