In following up with the theme of the week and the article “How gold would be used in hyperinflation,” the news yesterday was quite startling for those who follow monetary policy.
Zimbabwe Central Bank governor, Gideon Gono, has proposed the introduction of a gold-backed local currency. Why is this significant? Will this potential action solve the currency crisis for Zimbabwe? According to Zimbabweans, they think Gideon Gono is delusional.
“Gono is mad. Can he not see how Zimbabweans have suffered under his experiments,” asked Letwine Domingo, a Harare housewife.
“We don’t want the Zimbabwe dollar back. They will just print those worthless papers again,” said Chino Nharo, a Harare worker.
A better question might be, can Zimbabwe learn from the U.S. failed attempt to back currency with gold and just as important, can U.S. citizens learn from the Zimbabwe crisis?
What should Zimbabwe do about their currency?
Zimbabwe should lead by example and make gold their currency and tell their Central Bank to get lost.
Zimbabwe’s Central Banks solution to their currency crisis is to print more “worthless paper” as the bright Zimbabwean quoted above declared. Even with the assumption that the new currency would be “backed by gold” won’t fly with the local folks who have experienced first hand Central Bank and government intrusion into their lives.
Being only 6% of Zimbabweans are employed, there isn’t much faith in paper currency which government would have you believe the GDP of a country backs currency. So what happens when the citizens of a country lose faith in the local currency? Answer: Hyperinflation
History of the Zimbabwe Hyperinflation
During the years 1998 – 2002, Zimbabwe was involved in a war with the Democratic Republic of the Congo that President Mugabe supported and eventually cost his country millions and devastated its economy. Then Zimbabwe instituted a Land Reform Program with World Bank help.
Mugabe’s Land Grab
President Mugabe however took matters into his own by seizing white owned lands and turning them over to black peasants. The land conflict had been going on for decades, but under Mugabe’s leadership resulted in the loss of hundred’s of thousands of jobs of Zimbabwe citizens that used to produce food. Instead, the farms deteriorated and produced nothing. Mugabe was sure to seize land for his own family though which still continues to this day.
Declining Economy and Abandonment
During this time, Zimbabwe’s other main source of exports, the mining industry was also in shambles because of government intervention and greed. The Reserve Bank of Zimbabwe had a monopoly on purchasing and exporting of all gold and silver produced in the country.
By 2003 because Zimbabwe wasn’t paying back any of the loans granted to them by the IMF and World Bank and all future loans were suspended to Zimbabwe and sanctions imposed including sanctions from the U.S. which were extended by the Obama administration. All of these actions have helped exacerbate the problem.
With the economy in shambles because of the collapse of commercial agriculture and with the mining sector in decline and sanctions preventing government companies from doing business, the Zimbabwe Central Bank could do nothing but print money to pay for government budgetary demands. The result of such monetary madness was rampant inflation eventually culminating in hyperinflation by 2007.
In February 2007, inflation hit 50% a month in Zimbabwe which according to currency expert and John Hopkins University Economics Professor, Steve H. Hanke, signifies hyperinflation.
By June of 2007, inflation was already at 200% and businesses were increasing prices to keep pace with inflation. If they didn’t do this they would be out of business. The government instituted operation dzikisa mutengo (price reduction) and businesses were forced to halve their prices. Government militia would come to their businesses and make sure their prices were reduced. Mobs of people would then come in and buy all the goods at the reduced prices.
The government plan of price reduction, which temporarily worked for a couple of months, soon led to higher and higher inflation. By the end of 2007, the annual inflation rate was 215,000%. Just six months later and the inflation rate was 41,400,000% culminating at 80 billion percent a month, the second worst in history according to Professor Hanke. “That means around 6.5 quindecillion novemdecillion percent a year—or 65 followed by 107 zeros. To get a handle on it, realize that it’s equal to inflation of 98% a day. Prices double every 24.7 hours.”
The Effects of Hyperinflation on the People of Zimbabwe
During this short time of hyperinflation, the people of Zimbabwe have been devastated. More than half of the 12 million population are in need of food and a cholera outbreak has killed thousands since 2000. The elections of 2008 were fixed by the Mugabe regime who threatened the opposition to the point of withdrawal thus leading to a recount victory for the man who has almost single-handedly is responsible for the sad state of affairs in Zimbabwe. The people of the country don’t have a voice.
Zimbabwe Says Goodbye to Their Currency
Inflation was so out of control that drastic measures had to be taken to restore confidence and try to return sanity to the country of Zimbabwe. Just printing larger and larger denominated bills like the $100 Trillion Note below, or taking zeros off of bills wasn’t going to work. The only solution that seemed to make sense was to take other countries currencies and use them as their own (even though the Zimbabwean currency would still be available, no one used it). The currencies used include the “[South African] rand, US dollar, Botswana pula, euro and British pound among others.”
Putting the burden on other countries who may go through the same problem is just putting a band-aid on the crack in the damn. Right now it may be a good enough band-aid to keep the water from seeping through, but paper is not match for the eventual deterioration of a Zambezi River current (and interesting the Cecil Rhodes connection to all of this) .
Zimbabwe’s $100 Trillion Note
Zimbabwe Central Bank Solutions – Just an Illusion
Now that inflation has subsided in Zimbabwe with the introduction of other currencies, the Central Bank Governor is proposing to do something about bringing back life to the local Zimbabwe currency. The solution proposed by Governor Gideon Gono, as mentioned in the opening paragraph, is to “back the currency with gold.”
The United States once had a currency backed by gold. In 1971 Nixon told the world to take our U.S. Dollars “as is” and closed the gold backing window for good. Since 1971, people were left to ponder “what really backs the U.S. dollar?’ Zimbabweans know all too well from experience not to trust their Central Bank, for it was the Central Bank that got them into this mess to begin with.
It was the Central Bank that funded the Mugambe regime’s deficit spending and pushing the country into hyperinflation. And now the citizens of Zimbabwe are to trust the Central Bank will be there for them by promising that gold will back a new local currency?
The Path to Recovery for the People of Zimbabwe is Paved With Gold Not Paper Backed by Gold
The people of Zimbabwe can do what no other country in the world is doing because of Central Bank influence. They can make gold their “local currency” and tell the Central Bank to get lost!
Zimbabwe has the natural resources to make gold coins the currency of choice and restore the trade among the locals. Take care of local business first, get the farms back to full capacity and produce the food necessary for the citizenry and then they can concentrate on other businesses. A country has to become self-sufficient first, before it embarks on the world platform.
Gold mining companies have already started to mine gold again after the Central Bank allowed them to as well as keep the proceeds. But why does the Central Bank have to be involved at all? Why not just get rid of them and make gold coins the currency? Sell some gold to foreigners to allow for facilities to be built in minting coins and take back control from those who seek to control Zimbabwe and profit from their desire for its natural resources of platinum, coal, diamonds, copper, nickel, tin and clay as well as lithium minerals, chrysotile asbestos, ferrochromium, and half the world’s known chromium.
The U.S. Dollar has lost much of its purchasing power since losing its gold backing in 1971 and has been battered by competition from the EURO and gold ETFs since 2000. While the U.S. dollar is sliding (sans some bounces), Zimbabwe can set the example, not for the world’s highest ever known inflation rate, but for the modern world’s first gold currency.
Gold has over a 5,000 year history of money. The Krugerrand can stand right along with the Zimbabwe one ounce gold coin. Imagine never having to worry about inflation ever again?
There Is No Better Time Than the Present
Are Zimbabweans to wait for someone else to tell them what to do? How has that worked for them so far? All they gave Zimbabwean’s were sanctions that hurt them more. Some here in America know Zimbabwe citizens are not “delusional” like the Central Bank Governor as they know their own Federal Reserve is delusional.
Things can’t be any worse than they are now for Zimbabweans, but they must do what is right for themselves. The way out of their mess is with a sound golden currency.
Naturally the citizens of Zimbabwe know this. They’ve had enough suffering at the hands of those who got them to this point in time. There is no better time to take your country back!
Americans could also learn what they need to do so that something like what happened in Zimbabwe could never happen here (and you know dang well we’re on our way!).
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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