Hyperinflation in Zimbabwe!

by on January 4, 2017 at 7:25 am in Uncategorized | Permalink

The latest section of our Principles of Macroeconomics class covers Inflation and Quantity Theory of Money and the first video in that section is on the incredible story of hyperinflation in Zimbabwe. Check it out! And don’t forget that all our videos pair beautifully with Modern Principles of Economics our exciting textbook!

1 bill January 4, 2017 at 8:17 am

Does your textbook discuss how the Fed ran out of ink and became “powerless” to create inflation in the US from 2009 to 2013? [being facetious, of course]

2 Alex Tabarrok January 4, 2017 at 8:28 am

Yes. Inflation, understood as large and persistent increases in prices, is always and everywhere a monetary phenomena but monetary phenomena are not always and everywhere inflationary.

3 Brian Donohue January 4, 2017 at 9:51 am

I think this is a little bit glib, Alex. Would you agree that the Fed policy of paying interest on excess reserves at above-market rates has financed a lot of the Fed’s QE policy, so the Fed didn’t need need to print the trillions of dollars needed to implement QE? In this light, QE wasn’t nearly as expansionary as most people assumed it would be. In other words, the “monetary phenomena” of the past eight years was much less a loose money policy than most people understand.

4 bill January 4, 2017 at 10:05 am

@Brian D., You have it exactly right. The Fed could provide ten trillion more in reserves and it could have close to no effect if it pays a high enough rate of IOR that all it does is sit in the banks’ vaults (provided they combine it with the rhetoric of the last 7 years). They basically sterilized most/all of their QE by paying IOR on daily deposits than a bank could earn buying 3 month or 6 month Treasuries.

@ Alex T., I hope it was clear that my sarcasm was directed at people saying that the Fed was out of ammunition and not at you.

5 josh January 4, 2017 at 10:14 am

I don’t really understand this stuff, what is the point of QE if your going to pay banks not to lend money?

6 Alex Tabarrok January 4, 2017 at 10:16 am

Yes to both Brian and bill. See my earlier post in 2008 on this issue. I don’t think that’s the whole story, v has gone down, but it’s an important part of the story.


FYI, we are going to cover Fed operating procedures under the new regime in a soon to be released video.

7 chuck martel January 4, 2017 at 10:18 am

US government policy, including monetary policy, is to assure the profitability of the US banking industry. It’s priority numero uno.

8 The Anti-Gnostic January 4, 2017 at 10:31 am

@josh – the banks were holding a bunch of junk assets. The Fed prevented the banks from going bust through this and other transactions. It would be no different if the Fed had stepped in to buy all the underwater houses instead of all the underwater derivatives based on the houses. Only the objects of this largesse differ.

In other words, the Fed is interfering with market-clearing mechanisms.

9 Ray Lopez January 4, 2017 at 10:54 am

@bill, @Brian Donohue–will both of you acknowledge that the Quantity Theory of Money is a backwards looking accounting identity (therefore says nothing)? That money is neutral (except in hyperinflation, with menu and shoe leather costs)? (crickets chirping… silence is deafening). Do read Bernanke’s 2002 FAVAR paper…unlike Scott Sumner who refuses to, not unlike a medieval Catholic priest and his attitude towards the Bible and his peasant congregation (afraid they might learn something if they read).

As for the video, it says nothing interesting except that during hyperinflation, money is not neutral as you have menu and shoe leather costs (the wheelbarrows were interesting, that seems to be a universal phenomena).

10 Brian Donohue January 4, 2017 at 11:07 am

@AG, an alternative interpretation is that the financial crisis was a liquidity crisis, not a solvency crisis.

I’m not sure how it has shaken out, but I suspect a lot of the “junk” assets bought be the Fed have since recovered in value from their 2009 lows. Lots of people didn’t end up defaulting on their mortgages and, even in the event of default, the mortgage-holder held an underlying asset (the house itself), that has likely recovered somewhat from 2009 levels.

Here’s the story I tell myself:

1. In 2008-09, trillions of investor dollars piled into cash out of crisis-related fear, driving short-term rates to zero and reducing the velocity of money (what Keynesians call a ‘liquidity trap’, except for what followed.)

2. The Fed paid the banks 0.25% interest to hold this cash as reserves.

3. The Fed used the cash from reserves to buy risky assets (e.g. mortgages) from the banks.

4. In effect, banks swapped risky (but higher-yielding) securities for low-risk / low-return assets (Fed reserves earning 0.25%), that allowed for a modest profit versus the interest credited to savers (0%.)

5. The Fed was on the other side of this trade: borrowing money from banks at 0.25% and buying up a lot of these risky securities from many of these same banks.

6. I think this trade has worked out for both parties: banks reduced their asset/liability mismatch and stabilized their balance sheets, and the Fed acquired a portfolio of risky assets that, I suspect, have earned quite a bit more than the 0.25% financing cost, making this a profitable deal for the Fed (i.e. taxpayers) even though it was risky upfront.

I’m sure I haven’t got this completely right, and maybe there is some moral hazard going on here, but it seems to me the Fed has fulfilled its mission as “lender of last resort” in the process. The crazy, recursive thing to me is that the Fed’s commitment to do whatever it takes here, by itself, created the conditions under which the risky assets they acquired recovered in value. (I think we saw a similar dynamic with TARP.)

11 Rock Lobster January 4, 2017 at 11:51 am


All of the MBS that the Fed bought was Agency MBS, which is to say, guaranteed by the GSEs (and for practical purposes, the US gov’t). Fannie and Freddie were themselves bailed out but that was the Treasury, not the Fed. TARP was also done by the Treasury and voted on by the Congress.

12 The Anti-Gnostic January 4, 2017 at 1:06 pm

IOW, we printed money and bought our own debt with it.

Hey, if it works it works. I just don’t see how.

13 bill January 4, 2017 at 1:14 pm

@Ray Lopez, Sorry, but I don’t acknowledge that. The connection between money and prices/inflation may not be 100% perfect due to changes in velocity, but overall the QTM makes sense to me.

14 mulp January 4, 2017 at 1:54 pm

Oh NOooooo!

You can not mention VELOCITY!

When you mention velocity you raise the specter of capitalists being unwilling to invest in building capital because they are greedy and want increased scarcity.

Only FDR-Eccles from a pragmatic point of view and Keynes from a theoretical point of view saw the role of government to increase velocity, ie, force savings to be paid to workers. Both camps believed in capitalism so the savings needed to be forced to be paid to workers building productive capital assets.

Milton Friedman agreed with Keynes in the idea that government policy could force savings be paid to workers to build productive capital. And he attacked the tax code and regulation circa 1970 for causing too much building of productive capital creating too much wage income, too much consumer demand, too much production, and ultimately inflation from too much demand for goods and workers leading to higher wages and prices.

High tax rates and tax dodges of paying workers to build capital was one point of attack. And utility regulation and 8-10% ROIC was another point of attack. For the latter, electricity was too reliable and so plentiful utilities were promoting customers to buy more and more appliances to consume electricity – clearly a bad outcome of the regulation when only the wealthy should have lots of appliances. And for the former, too many oil wells were drilled resulting in too much oil production requiring the Texas Railroad Commission dictate limits on oil pumping for each of the too many oil wells while keeping oil prices too low at $3 a barrel for more than two decades. And for telephones, well, regulation led to too much wasted money in inventing new telephone stuff that should not be offered to the masses, like touch tone dialing, call waiting, three way calling, private lines, telephones even in remote areas – clearly too much capitalism by big government policy.

15 Brian Donohue January 5, 2017 at 8:58 am

@AG, NO!

In my story, the Fed didn’t need to print $4 trillion because of the new policy of paying interest on reserves beginning in October 2008, which, in an environment with a YUGE demand for cash, could be done for a comparative pittance (0.25%).

Thus, the mystery of the missing inflation is solved.

Note that, here in January 2017, the FFR is not 0%, it’s 0.50%. But the Fed persists in not only paying interest on reserves, but ABOVE MARKET interest (0.75%). This ensures a ready of supply of voluntary reserves from banks.

It may be in the interest of taxpayers to, at least, drop the “above market” thing if the FFR goes higher. No one is talking about this. (note: meme)

The danger of eliminating interest on reserves is that banks would slash their voluntary reserves, and the Fed would need to raise cash, and there are two options: contractionary, and expansionary.

The contractionary option is to start unloading its asset portfolio. This, however, might cut against the “whatever it takes” resolve, which could cause deterioration in asset quality as the Fed is unloading. Are we out of the woods yet?

The expansionary option is, at long last, firing up the money printer. THEN, we would see some inflation.

16 Brian Donohue January 5, 2017 at 9:27 am

THE FUNDAMENTAL THING (for all you Austrians out there), the underlying real causal mechanism here, was the YUGE demand for cash in 2008-09.

Confidence is a thing. Credibility is a thing. In the 2008-09 crisis of confidence and credibility, one actor was head and shoulders above the rest (worldwide, mind you): Uncle Sam. And Uncle Sam cashed in on his asset, almost a self-fulfilling prophecy.

“Don’t you see what’s happening here? Dontcha? Potter isn’t selling; Potter’s buying! He’s picking up some bargains. And why? Because we’re panicking and he’s not.”

Uncle Sam took all the YUGE demand for cash and redeployed it into the risky assets everyone was running from. As a taxpayer, I thank you, Uncle Sam/Potter.

Today, the underlying YUGE demand for cash remains, somewhat abated but we are living in the most “guarantees of any kind are very expensive” time of my 52 year life. People and businesses aren’t swimming naked anymore. Cash is a buffer, and sometimes, there are no substitutes. The lessons of 2008-09 are still fresh. A YUGE economy and an aging population suggest this is the new normal.

17 msgkings January 5, 2017 at 11:44 am

Terrific posts, Brian

18 罗臻 January 4, 2017 at 1:34 pm

If you include derivatives as part of the money supply (even limiting it to those that function like money in the banking system), the global monetary system has been in persistent deflation since 2008. All three rounds of QE were dwarfed by the contraction of large financial institution’s balance sheets. JPMorgan alone cuts its derivatives book by trillions.

19 Brian Donohue January 5, 2017 at 8:12 am

Alex, your 2008 piece was really excellent. Ahead of the curve.Bravo.

20 Jack January 4, 2017 at 10:22 am

Nicely done.

21 JC January 5, 2017 at 4:50 am

One of their best.

22 Tom Warner January 4, 2017 at 10:24 am

You haven’t really gone much into theory here, but given the rise of hyperinflationista scaremongering amid the rapid increase in money supply in recent years, you’d be doing a service if you avoided the outdated term “quantity theory of money.” The point is it’s very important to understanding contemporary developed-world macro to understand why monetary expansion without fiscal expansion and without pent-up credit demand can be non-inflationary, and also to understand that all episodes of hyperinflation including Zimbabwe’s result from coordinated monetary plus fiscal expansion.

23 Troll me January 4, 2017 at 8:20 pm

They sound like things that would be important to understand if true. Off the top of your head, can you suggest a reference or two which might provide more rigorous or thorough defense of it/them?

24 Alain January 4, 2017 at 10:29 am

Another solid video. Well done Alex & company.

25 GoneWithTheWind January 4, 2017 at 10:30 am

The U.S. government knows what Zimbabwe doesn’t know about inflation. To keep inflation down all you need to do is to pick the right inflation indicators. Ignore those everyday items that have increased in cost every year and focus on those mundane things that have not and voila there is no inflation.

26 dan1111 January 4, 2017 at 11:33 am

Yeah, because that totally works for bazillion % inflation. As long as the official statistic is low, nobody will notice those wheelbarrows of cash that everyone is carting around.

27 GoneWithTheWind January 4, 2017 at 7:08 pm

If you watch the video you will see a similarity between Zimbabwe in it’s early years and the U.S. during the Obama years. The difference is our government has been complicit in hiding inflation. Will it ever be hyperinflation? We don’t know yet, give it more time. If you had asked someone in Zimbabwe early on if they were going to experience hyperinflation they would have been in denial too. First denial, then anger… finally acceptance. Wait and see. Maybe our printing and borrowing of money will work out just fine.

28 Moo cow January 4, 2017 at 11:50 am

What ordinary items that you purchase in the US have experienced hyperinflation? Just curious.

29 carlospln January 5, 2017 at 5:09 am

1) resi r/e [admittedly, selected markets-the ones everyone wants to move to]
2) health insurance
3) university education costs

& I don’t even live in the USA

30 msgkings January 5, 2017 at 11:48 am

HYPERinflation is a totally different thing

31 Troll me January 4, 2017 at 8:26 pm

Mostly, it only feels that way sometimes because you’re aware of where the pinch is, and remember this throughout the period.

However, say when gas prices fall by 20% (to some previous norm, say), you rejoice for a day or a week and then continue on as though it were always normal. But that period when it was 20% above norm? People will bitch and moan about it for months and years, no matter how ineffective it is to do so.

However, I do believe that for reasons of scarcity and lack of planning for densification in many/most cities (my understanding is that the US is the absolute worst among wealthy countries in this regard, but I plead ignorance if someone would like to mention exceptions), it is in fact the case that rental costs (real estate in general) have risen drastically, and that this is among inflation costs which do not benefit from the previously suggested mechanism that explains why your perception is generally (almost entirely in many/most OECD counties) reflecting an exaggerated perception of the reality.

32 bill January 4, 2017 at 10:34 am

The post from December 2008 is excellent. If you update it, consider changing this “…however, the Fed has paid interest on reserves so there is no longer an opportunity cost to holding reserves.”
to this “…however, the Fed has paid interest on reserves that exceeds market rates so not only is there is no longer an opportunity cost to holding reserves; but holding reserves is profitable.”

Starting in December of 2015, the Fed should have started shrinking its balance sheet so that it could end the practice of paying IOR.

33 Tom Warner January 4, 2017 at 10:34 am

PS And if you’re really interested in early-stage EM macro, you should grapple with the issue that some countries expand their money supply very rapidly with relatively little inflation and high real growth, by growing their banking system and financializing a previously cash and cash-flow-financed economy, while others that grow their money supply no faster but manage their fiscal and banking systems less well get stuck in ruts of persistent high inflation and low or erratic growth.

34 Ray Lopez January 4, 2017 at 10:58 am

…or not, since money is largely neutral says the evidence. Don’t confuse the crowing of the cock just before sunrise as the reason the sun rises. Central banks largely (except in Zim with hyperinflation) follow the market. Fed operations are largely cups of water in an ocean, as economist Deirdre McCloskey has pointed out.

35 Troll me January 4, 2017 at 8:47 pm

Could this be explained by situations where a billion dollars extra in a bank’s cash stock does not lead to additional economic activity because there simply are few/no additional borrowers who they are willing to lend to even at 0 interest?

In the second case, it sounds like that could be supply side issues, for example where lower profits lead to shutdown or reduced production, causing inflation that is still not high enough to attract additional producers. (Among other things, uncertainty and various forms of political risk might explain situations like that.)

For these sort of reasons, which are difficult to appropriately code into modelling analysis, I’d hesitate to take any sort of “rule of thumb” that does not introduce at least somewhat of a case study approach to develop analytical skills which are useful in providing good interpretations, whether to explain the fact of heterogeneity underlying an aggregated result, or to explain exceptions or apparent contradictions of basic theoretical constructs or assumptions.

36 Lanigram January 4, 2017 at 11:03 am

I am new, and ignorant, but this is the first time I have seen Alex or Tyler engage the denizens. Engagement is healthy for the blog and it’s associated community.

I love MRU and it’s videos – a fantastic idea.

MRU should be optimized for mobile. Currently, it feels like a PC application – especially the content review questions in the Youtube videos. Painful.

Mobile is the current platform, PC, even laptops, is the old platform. The future? Who knows?

Go mobile!

37 Troll me January 4, 2017 at 8:52 pm

Phones are for games and basic logistics/communications. In my opinion, better to stick with formats better suited to a learning-focused state of mind. Or, at least, less associated with mindless numbed scanning, etc.

Kind of like how supposedly people do better on tests if there are things similar to how they prepared, for example sitting in the same seat as you did during the class when you did the learning, practice, etc. So, opposite from that, separation from the mobile phones may be good for learning for a lot of people.

If true, providing mobile options for the full learning experience, as compared to using it to direct people towards some other medium, may in fact result in worse outcomes despite an apparently expanded access. I would be happy to be proven wrong, but I just highly doubt it. People who are attracted to free courses are unlikely to be experienced in high productivity use of their phones (like, I’m sure lots of people are DOING lots of things, just maybe not productive or focused in the sense that it creates a good basis of mindset or association to have a good learning experience when using that same medium).

38 Lanigram January 4, 2017 at 11:04 am

I forgot to say, great job!!!!

39 Lanigram January 4, 2017 at 11:14 am

Beautiful video!

However, the practice questions mentioned never appeared.

Your content is wonderful but it’s delivery is hamstrung by the technology. All you need is two simple apps – one for iOS and one for Android.

40 dan1111 January 4, 2017 at 11:37 am

Ugh. Who wants to download an app for every single thing? Not needed, there are other ways to solve the very simple problem of providing a link to a web Q&A form.

41 VL January 4, 2017 at 11:26 am

I lived in Botswana (just south west of Zimbabwe) in the early 2000s, and the stories out of Zimbabwe were tragic. I met several Zimbabwean professionals doing maid work in Botswana (former CPAs, physicians, technical sales, etc). One week Zimbabwe just ran out of gasoline. Another week they ran out of corn meal. And yet Mugabe remained popular. Sad that one man and his cronies can inflict such harm on millions of people.

42 The Anti-Gnostic January 5, 2017 at 1:04 am

Venezuela needs a good old-fashioned coup, but they won’t even get that. People will believe in something for nothing to the very end.

43 msgkings January 5, 2017 at 11:50 am

Isn’t ‘the very end’ in fact a coup of some kind?

44 Dzhaughn January 4, 2017 at 1:00 pm

$295, wow.

45 Mike Sproul January 4, 2017 at 1:36 pm

The inflation in Zimbabwe happened because the base money supply outran the central bank’s assets, not because it outran the production of goods.

46 The Anti-Gnostic January 5, 2017 at 1:05 am

Where does the central bank get its assets from?

47 Donald Pretari January 4, 2017 at 1:37 pm

STEPHEN LONG: You’re not suggesting that American could end up in a situation like Zimbabwe with totally out-of-control inflation? PETER SCHIFF: No, no, yes, I am. I’m not only suggesting that, I’m saying that.

This was my response:

Don the libertarian Democrat (URL) said:
Mar. 19, 11:39 AM
This is what happened in Zimbabwe:


“On the economic front, the situation is dire. The economic crisis that was precipitated by Mr. Mugabe’s seizure of commercial farms in 2000 has put four out of five Zimbabweans out of work. The government’s tax revenue collapsed as did most of the public services. The Reserve Bank of Zimbabwe was ordered to print money to make up for the budget shortfall, leading to the first hyperinflation of the 21st century.”

It should be understood that politics plays a huge part in how crises are dealt with. In Zimbabwe, these actions are a designed policy to keep a despot and his minions in power. If deflation would have worked, he would have done that. Just so we know what’s actually going on in Zimbabwe.”

For years, I posted comments on blogs explaining that hyperinflation in Zimbabwe was a policy, not an outcome, because many commentators were claiming it could happen here. Well, it didn’t. Not even close. Sadly, the policy worked for Mugabe, as, beyond belief, he’s still there.

48 msgkings January 4, 2017 at 1:40 pm

More evidence that Schiff is useless.

49 The Anti-Gnostic January 5, 2017 at 1:11 am

Well if it can’t happen here, then let’s print some effing money and retire all our debt with it. And eliminate taxes while we’re at it. The Fed can just honor every check presented to the Treasury’s account.

50 msgkings January 5, 2017 at 11:51 am

This is close to what Japan is doing, and our demographics may someday approximate theirs….

51 Brian Donohue January 5, 2017 at 12:37 pm

I think this is actually a useful thought experiment. Our debt will be resolved one way or another.

In general, funding current government spending with current tax dollars makes sense on the assumption that the current cohort of citizens/taxpayers are likely the chief beneficiaries of current spending. Fairness/inter-generational equity.

For government “investment” spending, issuing debt is justifiable assuming the investments generate a return over time. Since future cohorts of citizens/taxpayers stand to benefit, it is only fair that they bear some of the cost for this. Fairness/inter-generational equity.

It seems clear to me that the $20 trillion in government debt, most of which was incurred this century, does not track with a huge increase in government “investment” spending during the 21st century.

Arguably, neither current taxpayers (via higher taxes today) nor future taxpayers (via increased government borrowing) are responsible for most of this debt.

Which only leaves past taxpayers (hi, Boomers!). They are older, and they hold most of the financial assets (e.g. bonds.) Monetary debasement (printing money, inflation) is one way of getting our pound of flesh from these cohorts. I’m in favor of modest inflation in part on grounds of inter-generational equity.

Note that a one-time switch in emphasis from taxing income to taxing consumption can also be justified on these grounds.

In light of where we are today and how we got here, a few years of 3%+ inflation is the least these damn Boomers can do to chip in toward the $20 trillion.

52 bill January 5, 2017 at 3:30 pm

Well said.
While the budget should have been much closer to balance for the last 16 years, most Americans should be thankful for the totality of our position in this life even though it is modestly, and unnecessarily, somewhat offset by this debt.

53 mulp January 4, 2017 at 1:58 pm

At least Zimbabwe is not harmed by being under the thumb of the ECB which forbids if from solving it’s government spending and general economic stagnation by printing Euros by the trillions. If only Greece were more like Zimbabwe, Greek would be paradise!

54 Todd K January 4, 2017 at 5:15 pm

Another great video and the first part “It’s hard to be a dictator” made me grin. But if I see bobbing Mugabe head appear in a nightmare, I’m filing a complaint.

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