Erich Bloch: Explosive Dollarisation Mania

IT is common cause (even to an obtuse government which only believes that which it wishes to believe), that Zimbabwe’s economy has been progressively declining since late 1997.

 

(Of course, even though government acknowledges that deplorable reality, it vigorously and vehemently refutes any and all suggestions that the ongoing economic demise has been, and is being, caused by it.
Instead it resonantly and endlessly attributes Zimbabwe’s economic ills to Tony Blair, Gordon Brown, George  Bush, the European Union, many Commonwealth states, and to government’s political opposition and to economic sanctions which, prior to 2008, did not exist, save and except in government’s devious and exculpatory mind.
Nevertheless, whatsoever the real causes of the continuing contraction of what was once a virile, growth economy (and those causes are almost totally actually attributable  to government, to its acts of commission and omission, to its convictions of omnipotence and infallibility, and therefore  to its inability to recognise error, or to admit thereto), the tragically harsh fact is that now the economy is no longer merely shrinking, and becoming less and less of substance, but it is actually on the threshold of imminent, almost absolute implosion. Whilst the catalyst for  the potentially forthcoming implosion has been government’s obdurate mismanagement  of the economy, now the consequential  trigger is being armed by the populace in general,  and the business community in particular.
Underlying the trigger, which is the all-encompassing negation of value of Zimbabwean currency, and therefore the combined official and unofficial dollarisation of the economy, is the most horrendous, monstrous inflation ever experienced, not only in Zimbabwe, but anywhere in the world.
Until 2008, as Zimbabwe increasingly became the victim of hyperinflation, economists could “play down” the intensifying of that hyperinflation by drawing attention to the very considerably higher levels of inflation that prevailed in Germany in 1992 to 1924, in Hungary, in 1946, in Italy and in Israel in the 1970s, in Bolivia, Brazil, and in Mozambique and in Zambia at the time of the millennium, and shortly thereafter. But now Zimbabwean has soared to all-time high levels, according Zimbabwe the unenviable status of the highest-ever sustained inflation.
The renowned and very highly respected Professor of Applied Economics at the Johns Hopkins University in the US, Prof Steve H Hanke has, in the absence of any authoritative Consumer Price Index (CPI) and inflation data from Zimbabwe’s Central Statistical Office (CSO), developed a new Zimbabwean hyperinflation index. He is one of the world’s leading experts on exchange-rate regimes, and has created the Hanke Hyperinflation Index for Zimbabwe (HHIZ), derived from market-based price data. Based upon that index, the annual inflation rate was, on August 1, 2008, 391 000 000% (three hundred and ninety-one million%). Within two months it had risen to 1 800 000 000 000% (one comma eight trillion%), and only three weeks later it had soared to 10 200 000 000 000 000% (ten comma two quadrillion%)! These rates of inflation are derived from market-based price data.
With such cataclysmic levels of inflation, beyond the ability of all but a very few to comprehend and relate to, Zimbabwean currency no long has any meaningful value. Whatsoever currency may be in a person’s possession has lost the substance of value within days, if not hours, and hence none wish to be possessed of such currency, whether in cash or in the bank. Therefore, any in receipt of Zimbabwean currency are most anxious to dispose of it forthwith, be it for consumable or other goods (if they can find anyone willing to accept Zimbabwean currency for such goods) or for investment into enduring assets. However, in like manner, few are willing to dispose of goods, or disinvest from assets, in exchange for Zimbabwean currency which is depreciating with cataclysmic rapidity.
To all intents and purposes, Zimbabwe’s currency is now the United States dollar, the South African rand, the Botswana pula, and the British pound, reinforced with diverse other international currencies of standing and repute. In terms of law, only those licensed and authorised by the Reserve Bank of Zimbabwe, being the recently established Foliwars retailers and wholesalers, and licensed vehicle service stations, may conduct their trades in foreign currency but, in reality, almost without exception all businesses are demanding that payments be made in acceptable foreign currencies or, in the alternative, in Zimbabwean currency based upon exchange rate conversions from “pegged” foreign currency prices.
However, those conversions have to be effected at rates of exchange prevailing in the unlawful, alternative foreign currency markets, and not the specious  manipulated, government-favouring, interbank rates, And, in those foreign currency markets, the rates are surging upwards continuously, driven by the immense disparity between supply and demand.
The upward surge in rates is reinforced by so many using Old Mutual Implied Rate (OMIR) as a guide to realistic rates of exchange. The OMIR is determined by a correlation of the price of shares in Old Mutual on the London Stock Exchange with the price of the shares on the Zimbabwe Stock Exchange. However, whilst a year or  more ago OMIR  was a very realistic guide to fair,  inflation-related,  exchange rates, and to the adjustments  necessary to compensate for inflation, that is no long so,  for the prices of the shares are no longer  driven primarily by inflation,  but by other factors.
This is loudly emphasised by the extent that Old Mutual share prices have fallen on the London Stock Exchange, reactive to the current global economic crises, and to political developments, whilst those prices have surged upwards in Zimbabwe. The local price escalation is due to the fact that in the prevailing hyperinflation environment none,  or very few, wish to dispose of shares for cash, whilst  many are anxious  to dispose of cash for shares, resulting in demand vastly exceeding supply, with resultant almost  continuous  rises in price.
Those price rises in Zimbabwe, concurrently with falling prices in London, reflect in the OMIR. On October 23, 2008 the OMIR was 28 126 531 891, 46. Within two trading days it rose to 105 026 256 564, 14, then on the following day briefly fell to 70 398 738 454, 60, and only three days later had soared up to a gigantic 3 907 567 059 432, 98. As horrifically great as is Zimbabwean inflation, it is not that great and, therefore, OMIR is no longer a realistic inflation barometer. But it is still being used as a major guideline to exchange  rate movements, and is therefore impacting rapidly  upon the costs  of all imports, and upon the foreign-currency prescribed, or pegged, domestic market prices.
This is causing a self-perpetuating, continuous rise in inflation to such a monolithic extent that, unless sense and reason very soon prevails in the private sector, as well as the overwhelming need therefore in the public sector, Zimbabwe’s economy will totally implode, as a direct consequence of intensifying dollarisation mania.

Top