When all else fails, try to cut off the revenue source:
The Munich-based company that has supplied Zimbabwe with the
special blank sheets to print its increasingly worthless dollar caved
in to pressure on Tuesday from the German government for it to stop
doing business with the African ruler.Mr. Mugabe’s regime
relies on a steady supply of the paper — fortified with watermarks and
other antiforgery features — to print the bank notes that allow it to
pay the soldiers and other loyalists…
Here is the story. And in case you are wondering, it’s the same company that printed up the bills for the famous Weimar hyperinflation of the 1920s. In fact only a few companies in the world can make so much "quality" money in such quantities so quickly. When in doubt, go with experience! They’ve been airlifting the bills to Zimbabwe in huge quantities; by the way their motto is "Creating Confidence." Not as good as "Always Low Prices" if you ask me.
The deeper question is why any tyrannical government would find such a high inflation rate to be seigniorage-maximizing. At some point people simply abandon the currency or prices end up rising as fast or faster than the government spends the newly printed money. (Related query: When the number "quadrillion" is in play, are the "anti-forgery" features of the paper really needed? Isn’t the value of the bill higher as paper in any case?) Under one hypothesis, the time horizon is very short and the mass printing of bills maximizes seigniorage on a week-to-week basis but not overall. Under another hypothesis, seigniorage is declining (given price expectations), but without the stream of new bills it would be declining even more rapidly. I know who to ask.
At the point in which seigniorage is no longer relevant, Mugabe will have to rely on some other source of funds to finance his soldiers. Rather than asking Mankiw, I suggest that Mugabe asks Domingo Cavallo. Domingo knows a lot about hiperinflation: in July 1982 (under the Military Junta) he triggered the hiperinflation that plagued Argentina until his convertibility plan of March 1991 (under President Menem); and then in December 2001 he established the “corralito”, the failed attempt to confiscate bank deposits that precipitated the flight of Presidente de la Rua. Domingo is the only one that can assure Mugabe’s failure.
“Not as good as ‘Always Low Prices’ if you ask me.”
Funniest Tyler Cowen sentence I’ve read this year.
Melvin, I suspect a Worldbank or IMF loan or two.
“…The deeper question is why any tyrannical government would find such a high inflation rate to be seigniorage-maximizing. At some point people simply abandon the currency or prices end up rising as fast or faster than the government spends …”
It is the same reason we have a banking crisis. Given any position of middle management authority the relevant actors (the treasury in Zimbabwe or the loan guys in 2006 NYC) have no choice but to meet financial targets in the here and now. Worrying about the future is above their pay grade, but no one above their pay grade understands or cares or is compensated for considering the issues.
Somewhere Milton Friedman is smiling and saying “thank you Germany for listening to me when i said mv=pq”
The Reserve Bank of Zimbabwe is currently quoting
13,350,764,705.88 Z$ for 1 US$:
http://www.rbz.co.zw/currencyexc/Forex_02072008.asp
Is there actually any market at all for this stuff?
bbartlog, these people are *self*-maximizers, making the best decisions with the information that they have. These aren’t economists trying to make the world a better place, these are thugs living high on the hog while their people suffer. They don’t care.
Zimbabwe is now so screwed up, even if Mugabe is outed things won’t get much better for a long time. I’m sort of offended that only now are world governments in an uproar, while for the last decade as Mugabe increasingly seized power and abused rights – when the real damage was being done – all they could muster was a collective “hmph”.
What do these numbers even mean? Is anyone actually willing to trade with them? What is the point of having any currency at all?
No worries! http://www.rbz.co.zw/pdfs/assurance.pdf the quite professional-looking Reserve Bank of Zimbabwe site assures us:
“1. Following the widely publicized termination of bank note
paper supplies to Fidelity Printers (Pvt) Ltd, by Giesecke &
Devrient of Germany, who have been our suppliers of bank
note paper for the last 40 years, the Reserve Bank of
Zimbabwe wishes to advise and assure the Nation that this
development will not disrupt the smooth flow of business.
Proactive and appropriate measures and strategies had
already been put in place once it became clear from
international sources that this was the direction our bank note
paper suppliers were likely to be forced to go.
2. To this end, therefore, the banking and transacting public
should go about their business in the usual manner as the
above-mentioned development will not have any impact to
the economy.”
BTW today’s exchange rate vs. $US is 15 183 703 996.98, up from 14 345 060 331.82 yesterday.
Somewhere around here I’ve got at 10 bn dinar note from Yugoslavia, circa 1994. Or maybe it’s 100 bn. It’s a nice bookmark.
There’s a watermark, but I don’t think there are any other security features in the paper. Can’t really see the point.
On the other hand, unsustainable trends don’t last. (duh.) So maybe some of that G&D paper was intended for whatever the next currency will be. Milosevic hung on for a good while after the hyperinflation, reminds my pessimistic side.
It is enlightening!
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