Zimbabwe's inflation is sustainable, or What the thugs are thinking
A lot of people are still wondering about Zimbabwe's hyperinflation, estimated at about 9,000,000% as of mid-June. Cowen, among many others, is still thinking through the lens of seignorage, i.e. printing money is a tax on holders of money, but costs through the cost of bank notes and damage that inflation causes to the economy.
Hyperinflation is attributed to incompetence, a Government shooting itself in the foot, those stupid African communists.
But it's not as stupid as it looks; the problem is that commentators still think of Zimbabwe as a state with a Government. In the last five years Zimbabwe has ceased to have a Government: it has been replaced with a small group of thugs operating the machinery of a state.
9,000,000% inflation makes no sense from the perspective of a Government. Hyperinflation destroys a state because (i) its citizens turn to other currencies or escape to other countries, (ii) economic activity grinds to a halt, and (iii) the Government finally runs out of people who will pay for its paper. This usually happens well before 9,000,000%. It does not happen in Zimbabwe because (i) security forces in Zimbabwe will arrest you if you try to buy or sell anything with foreign currency, (ii) the economy has mostly been killed but there are enough remittances from family members to keep the thugs in business, and (iii) security forces and mobs in South Africa are doing everything they can to stop Zimbabweans from fleeing and keep them trapped in Zimbabwe.
Zimbabwe a state no longer; it is a prison for its citizens, and hyperinflation is just one cog in the machinery of punishment. 9,000,000% inflation makes a lot of sense from the perspective of a small group of thugs operating a state. By forcing people through threat of violence to continue to transact in Zim dollars, you can sell them worthless paper for the foreign currency they get from their relatives outside. They would leave, but with the assistance of your state neighbors like South Africa, you force them to stay. Their relatives keep sending them money because they will starve without it. They keep using that money to buy Zim dollars because they will be thrown into prison if they don't.
The citizens of Zimbabwe are held hostage, and the thugs known as ZANU-PF are collecting ransom after ransom from their relatives. People are waiting for the country to self-destruct, but I'm afraid this money pump is more sustainable than commentators have suggested.
It's a remarkable little operation, and it seems like few outside of Zimbabwe have understood it.
Some references:
Zimbabwe's
people kept alive by remittance market
Letter
from Harare
Labels: Zimbabwe
