GERMANY AND ZIMBABWE HYPER-INFLATION

INFLATION RATE• The inflation rate is the percentage rate of change of a price index over 

time.

• Inflation rate measures how fast prices for goods and services rise over time.

HYPER-INFLATION RATEHyperinflation is very high inflation. Although the threshold is arbitrary, economists generally reserve the term “hyperinflation” to describe episodes when the monthly inflation rate is greater than 50%

CAUSES OF INFLATION

                Excess Aggregate Demand

Cost Push Factors

ZIMBABWEOn 18 April 1980, the Republic of Zimbabwe was born from the former British colony of Southern Rhodesia.

Early years: • Zimbabwean dollar was more valuable than the US dollar. • Zimbabwe experienced strong growth and development. The tobacco

industry was thriving . Strong Economic indicators.

From 1991 to 1996: • Zimbabwean government embarked on an Economic Structural Adjustment

Programme (ESAP)

In the late 1990s:• The government instituted land reforms intended to redistribute land from

white landowners to black farmers to correct the 'injustices of colonialism'.

From 1999 to 2009:• sharp drop in food production ,collapse of banking sector and others.

REASONS• Zimbabwe is the front-line evidence that shows that government deficits

will generate hyper-inflation.

• The Mugabe government was printing money to finance involvement in the war with Democratic Republic of the Congo and, in 2000, in the Second Congo War. Zimbabwe was under-reporting its war spending to the International Monetary Fund by perhaps $22 million a month.

• Another motive for excessive money creation has been self-dealing. Transparency International ranks Zimbabwe's government 157th of 177 in terms of institutionalized corruption.

• Lack of confidence in government to practice fiscal restraint feeds on itself. In Zimbabwe, neither the issuance of banknotes of higher denominations nor proclamation of new currency regimes led holders of the currency to expect that the new money would be more stable than the old.

GERMANYGermany lost world war I but exited at more or less at the right time for its economy to recover, but they had no plans for mobilizing its civilian economy from the war effort.

Germany lost the war because it was decisively defeated by a stronger military power.

Die-hard nationalists had the chance to blame the civilians back home for betraying the army and surrendering.

This soured German politics in the 1920s and caused a distrust of democracy and the Weimar government.

REASONS• The outbreak of hyperinflation in Weimar Republic in 1920s actually had

its roots since World War I. • The Germans had borrowed a large sum of money to finance the war.

Inadequate supply of fund forced the Central Bank, Reischbank to print more money to finance itself.

• The "London ultimatum" in May 1921 demanded reparations in gold or foreign currency to be paid in annual installments of 2,000,000,000 (2 billion) goldmarks plus 26 percent of the value of Germany's exports.

• Later, the Germans decided to stop paying the reparations. In response the French & Belgian troops occupied Ruhr in 1923, the more industrialised area. They intended to get reparations in the form of goods & raw materials.

• Beginning in August 1921, Germany began to buy foreign currency with Marks at any price, but that increased the speed of breakdown in the value of the Mark.

GERMANY HYPERINFLATION

Reparations

French marched into Ruhr

Workers on Strike

ROOTS FROM WORLD WAR I

WORKERS ON STRIKETo prevent the French from getting money, Germany asked their workers to go on strike.

50 MILLION NOTE

1 BILLION NOTE

PRICE OF A NEWSPAPER

USING NOTES AS NOTEPAD

CARRYING DAILY WAGE

ZIMBABWE HYPERINFLATION

War Veterans

Zimbabwean Military in Congo

Land Reforms

WAR VETERANSThe first was that the war veterans, who fought for independence and had traditionally been loyal to the ZANU-PF, became ever more disgruntled with the ruling elite’s growing wealth and began demanding a bigger stake. In response, Mugabe committed to increase pension payments and other forms of benefits.

ZIMBABWEAN MILITARY IN CONGOSecondly, Mugabe ordered an expensive deployment of the Zimbabwean military in the Demo cratic Republic of Congo (which lasted until 2003), in order to support the regime of Laurent Kabila, and in doing so protect the mining investments made by members of the Zimbabwean ruling elite.

LAND REFORM POLICYThirdly, and probably most crucially, critics argued that it originated from Mugabe’s controversial land reform policy. Lands were confiscated from the White farmers, further break down & ‘so said’ equitably distributed to landless peasants, when the primary beneficiaries are ministers & their nearest families.

Extent of Hyper Inflation

Price of a toffee

Money do see dustbins!

Britain stopped money supply

LAND LYING IDLE, NO PRODUCTION

Whilst the first two events increased government spending.

The third lowered production and exports, which reduced tax revenues.

This rise in government spending and fall in government income was “the beginning of the Zimbabwean’s economy’s downward spiral”.

Germany was now witnessing "the complete depreciation of the only truly credible value in this godforsaken era: that of money.“

The effect of the devaluation of the German currency was like that of a second revolution, the first being the war.

The ratio of the German price index in November 1923 to the price index in August 1922—just fifteen months earlier—was 1.02 × 1010. In October 1923, German prices rose at the rate of 41 percent per day

GERMAN HYPER INFLATION RATE

By late 1923, 300 paper mills were working top speed and 150 printing companies had 2000 presses going day and night turning out currency.By October 1923, 1% of government income came from taxes and 99% from the creation of new money

Date Inflation Rate

Jan 1919 2.6%

Jan 1920 12.6%

Jan 1923 2785%

Nov 1923 726 Billion %

ZIMBABWE HYPER INFLATION RATE• First country in 21st century to hyper-inflate.• In early 2009 the government printed the largest

denomination of currency, that’s Z$100 trillion.

Date Monthly Inflation Rate Annual Inflation Rate

Jan’07 13.7%

Dec’07 61.5% 215,000%

Nov’08 79.6 Billion% 89.7 Sextillion %

Inflation was more than 231 million percent on a year-on-year basis.

External debt as a share of GDP increased to 119 percent in 2008 from 11 percent in 1980.

CONSEQUENCES OF HYPER-INFLATION

Inflation and Unemployment - As inflation decreases, unemployment is expected to rise and vice-versa

Inflation and Investments- Inflation is greatly feared by investors because it grinds away at the value of your investments.

E.g. If you invest ₹100 today in a bank, that will pay you an interest of 5% p.a, you will be giving up ₹ 100 today for ₹ 105 in 1year. If over the course of that year there is a hyperinflation of 30%, the purchasing power of ₹ 100 has decreased by ₹ 30 and you have actually lost ground.

People can obtain less products for more money

Currency devaluates

Prices of goods go up

People have more money to spend

CONSEQUENCES OF HYPER-INFLATION

Price inflation soon turned to hyperinflation as Germany fell into a financial disaster.

In January 1919, one US dollar ($1) had been worth 8.9 German marks. By November 1923, $1 was worth 200 billion marks.

Money became worthless – stories existed of people stealing baskets but leaving money.

INITIAL IMPACTS

Prices rose so much that workers would rush to spend their wages as soon as they got them. Restaurant prices would change from the time a meal was ordered until it was eaten.

The government had 300 paper mills and 2000 printing companies working 24-hour shifts to produce banknotes.

The effects on most Germans were devastating.

Huge queues existed for food, and there was a food shortage as farmers would not sell for worthless money.

A barter economy developed, with people swapping items or services in exchange for essential items.

IMPACT ON FOOD AND ESSENTIAL GOODS

At first, many workers were given compensatory wage rises, however eventually their incomes fell below the speed of hyperinflation.

Some businesses struggled to cope, and as a result went bust or laid off workers, causing a large increase in unemployment.

IMPACT ON THE WORKING-CLASS

IMPACT ON THE MIDDLE-CLASS

People on fixed incomes (such as pensioners) were particularly hurt as they could not afford the hugely increasing prices.

Many members of the middle class who had savings saw the value of their investments wiped out overnight, forcing them into poverty.

IMPACT ON HEALTH• Hyperinflation had an

associated impact on health in Germany too.

• The rise of extreme poverty and food shortages meant that many people became ill and undernourished; this was especially true for pensioners.

• Many of these people blamed the government for their plight.

IMPACT ON HOUSEHOLD • However, some

Germans did profit from hyperinflation.

• People who had previously been in debt – mortgage holders, for example – easily paid off their loans.

• Others benefitted too; people on fixed rents or investors that could get cheap credit and increase their holdings.

POLITICAL IMPACTS • Unsurprisingly, the

German government faced public anger.

• At first they tried to compensate by printing more money, but ultimately this made the problem worse.

• Many Germans became attracted to extreme political messages, and began to lose their faith in democracy.

HYPERINFLATION IN ZIMBABWE

PROBLEM GOVT’S SOLUTION EFFECT

HIGH FOOD PRICES FIXED PRICES SHORTAGESBLACKS HAVE NO LAND REDISTRIBUTED LAND MORE SHORTAGES

COMPETITION FROM USA & SA BANNED IMPORTS STILL MORE SHORTAGES

NOT ENOUGH MONEY PRINTED UP MORE MONEY INFLATION(HYPER)

ZIMBABWE 1990’S

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 070%

10000%

20000%

30000%

40000%

50000%

60000%

70000%

INCREASE IN INFLATION - ZIMBABWE

Series 1 Series 2 Series 3

DUE TO HYPERINFLATION IN ZIMBABWE

A toilet paper

would cost you $417

You have to spare a

measly $50 Billion to

buy an egg

They even have a 100

trillion dollar note!

And with ONLY two

truck loads of money you could pay your

restaurant bill!

Agricultural production falls 51%

Industrial Production 47%

GDP falls 40%

Money Supply increases by more than 500B% (2008 estimate)

94% unemployment

Election Fraud

Human Rights abuses

Redistribution of farmland

HAPPENINGS FROM 2000-2007

THE FINAL RESULT• Germany defaulted on its payment to France and Belgium

• French and Belgium troops entered Germany and occupied Ruhr, the industrial capital of Germany to ensure that the reparations were repaid in goods

• They started harassing the Germans

• The Germans united and went on a general strike. Even the Government supported this strike. This is know as PASSIVE RESISTANCE

• The Government had to print more currency in order to continue paying the workers on strike

• By November 1923, $1 was worth 42,10,50,00,00,000 German Marks

GUSTAV STRESEMANN

THE STRESEMANN ERA : 1923-1929• Formed the ‘Great Coalition’

• Created a new currency called ‘Rentenmark’

• Accepted the Dawes Plan

• Central Bank stopped monetizing Government debt

• Young Plan

• Locarno Pact

• League of Nations

• Kellogg-Briand Pact

LESSONS FROM THE GERMAN HYPERINFLATION

• Failure of Fiat Money 

• Irrational quantitative easing doesn’t help

• Over confidence can be a killer

• Lack of proper governance can lead to a disaster

MULTI-CURRENCY SYSTEM

BENEFITS• Re-monetization of the

economy and financial re-intermediation• Enforce fiscal discipline by

precluding inflationary financing of the budget• Brought transparency in

pricing and accounting after a long period of high inflation.

CHALLENGES• Prices and wages quoted in U.S.

dollars, while South Africa is Zimbabwe’s main trading partner and country of origin of capital inflows. • Shortages of small-denomination

U.S. dollar banknotes and coins pose difficulties for retailers. • loss of the national currency and

seigniorage is an undesirable erosion of sovereignty and monetary independence.

In order to stabilize inflation expectations and restore confidence, macroeconomic tool deployed is implementation of a fixed exchange rate pegged to a stable currency.

• In 2009, the government abandoned printing Zimbabwean dollars at all. From then through 2014, Zimbabwe still used a combination of foreign currencies, mostly US dollars.

Stop printing currency

• It shows how dollarization has allowed Zimbabwe to quash hyperinflation, restore stability, increase budgetary discipline, and re-establish monetary credibility.

Dollarization

• In 2014, the Reserve Bank of Zimbabwe unveiled "convertible" coins in denominations of US$0.01 through US$0.50. The Bank said that 80% of Zimbabweans use the U.S. dollar

Convertible coins

• It lead to decreased printing of currency and hence, reduction in inflation

Freezing government spending

DEMONETISATION IS A NECESSITY “Demonetisation is the act or process of removing the legal status of a currency unit. In our case the currency unit is the Z$ that we are demonetising. Demonetisation is necessary whenever there is a change of national currency. The old unit of currency must be retired or decommissioned.”