Thursday, March 15, 2007

Hell of hyperinflation

Can you say, Weimar?

The phrase Weimar Republic is an invention of historians....
The Weimar Republic had some of the most serious economic problems ever experienced by any Western democracy in history. Rampant hyperinflation, massive unemployment and a large drop in living standards were primary factors.


Zimbabwe sinks into hell of hyperinflation
Images of Morgan Tsvangirai, Zimbabwe’s opposition leader, his face swollen and his head visibly wounded as he faced charges of illegal protest, testify to the deepening brutality, cynicism and desperation of President Robert Mugabe’s regime. Behind that desperation is an economic chain reaction that will, unless halted soon, lead to the collapse of the Zimbabwean state and turn the country into an anarchic hell.

Zimbabwe’s latest official inflation rate is 1,730 per cent. The real figure – for the median household at actual market prices – is almost certainly much higher. Price rises have accelerated sharply in recent months.

Zimbabwe has entered hyperinflation. What has happened so many times, from Weimar Germany to Zaire in the early 1990s, is happening again. As people come to expect accelerating inflation they will raise prices in anticipation, creating a spiral that feeds on itself. Chronic inflation, of a few hundred per cent per annum, can continue for years. A hyperinflation cannot.

Prices are either stabilised, or the monetary system collapses, and the economy reverts to barter and the use of foreign currency. On the monetary system rests the state: when a soldier or policeman is paid in worthless currency, he will take his gun, turn bandit and live off his fellow citizens.

Yet, a hyperinflation can be stopped easily. No outside help is needed and stabilisation at least can be achieved without much reform. All the government has to do is make a credible promise that it will not revert to the printing press and that it will balance its budget. But no government led by Mr Mugabe can make such a promise and expect to be believed.

The hyperinflation is driven by corrupt and inefficient public bodies, packed with government cronies, that demand foreign currency from the central bank to buy fuel or fertiliser from abroad. They siphon off wealth and come back for more. That is how Mr Mugabe’s government works.

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