Zimbabwe’s Third Time Lucky – The Return Of The Zim$

That Zimbabwe has suffered the most appalling economic mismanagement in recent decades is clearly true. That it’s a reasonable example of the application of Modern Monetary Theory to the world is also true. MMT says that governments aren’t fiscally constrained, they can just print money to pay for things and as long as the economy has unused resources she’ll be fine. The resources start getting used, all get richer. This should stop once inflation arrives because that’s when it should stop. Either government stops spending newly created money or it raises taxes to deal with the inflation.

So, first time around we got the printing and the spending but not the taxation. That’s how we ended up with the $100 trillion dollar note, the last run of which were worth so little they couldn’t buy the ink for the next print run. The country then moved to a foreign currency regime, meaning the local government simply didn’t have the power to print money. Inflation disappeared.

So, then they had another attempt at a local currency. Bond notes and the like. What happened next?

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Prices of most basics have risen by over 200% since September 2018, and the parallel market has discounted Real Time Gross Settlement (RTGS) and bond notes by 75% over the past 24 months, with most of the value having been shed over the last three months.[/perfectpullquote]

Now, they have since raised taxes and inflation is moderating. But that’s not enough they think so, another plan to do something. That being hoping for a third time lucky:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]There is a high likelihood that through the monetary policy, government will reintroduce the Zim dollar and do away with the multi-currency regime. This projection is based on recent utterances by the Minister of Finance, who said the USD is unsustainable and that Zimbabwe should expect a new currency within a year, a date he later revised downwards three days ago.[/perfectpullquote]

A new currency will work, of course it will. As long as two things happen – firstly, that they don’t print too much of it and secondly, that no one thinks they will. Inflationary expectations are important as well as just the physical size of the money supply itself. And given that the monetary authorities in Zimbabwe are currently batting 0 for 2, what do we think inflationary expectations are?

Quite, the new Zim Dollar is unlikely to work. A pity but there we are, third time isn’t lucky in monetary policy.