Precious Metalhead #2: QE Lite, Zimbabwe, Otep

August 10th, 2010

I write this month’s Precious Metalhead in the shadow of unusual uncertainty around today’s Fed meeting. In fact, I am racing Bernanke – the Fed announcement is expected at 2:15 today. The sugar-rush of short-term stimulus is wearing thin, the recovery is stagnant, and the Fed is trying to engineer their way out of a second major dip.
Personally, I’ve been gunning for the double-dip for years now… but in an election year with much at stake, the Fed and DC insiders really need a “V-shaped” recovery with a rapid return to whatever they consider normal. The problem, of course, is that their “normal” is about as hyper-levered and sugared-up as a big bowl of Cocoa Pebbles. In reality, we still have a lot of de-levering to go.
The markets have geared to expect another round of “Quantitative Easing,” a fancy name for printing money. The word on the street calls this “QE lite,” as if inflation were a diet, but with QE2 we will now be back to printing money to ward off deflation and stagnation.
With this backdrop, I’m pleased to deliver part one of my report on Zimbabwe. Here at Silver Circle, we are studying real-world inflation disasters to find out what REALLY happens, socially, individually, and economically in these extreme situations. We have had two major episodes in the last decade – Argentina and Zimbabwe – and I was fortunate enough to track down some Zim natives during a brief stay in the United States. They agreed to an interview as long as I assured anonymity.
Zimbabwe is now finishing a chapter of textbook hyperinflation, culminating in a 231 million percent inflation rate in 2008. In our movie, we have very high inflation, but nothing resembling the strange physics of hyper inflation. We will leave that for a sequel.
Zimbabwe politics are extreme. The president-dictator Mugabe rewrote the constitution in 1987, and again in 1990 to cement his power. Try that in the US. Rather than chronicle the history of this tragedy, I will focus on the monetary disaster here. Suffice it to say that historically, the chaos induced by heavy inflation requires a heavy-handed state.
Up through 1997 the Zim dollar experienced solid inflation, 14-25% per year, same as in Silver Circle. My friends took this in stride – they characterized this as normal. Here in the US, we tend to experience 2-5% per year, and have had peaks of around 15% in 1979 and 1946.
Amid political turmoil in 2000, the central bank of Zimbabwe began to inflate heavily, which led to a feedback loop effect, creating the need to print even more money. Inflation rose exponentially, peaking at 231 million percent a year in 2008. Prices would change daily and even hourly.

USD-Zimbabwe Exchange Rate (note the exponential scale)

Quickly, credit cards and checks disappeared from use – they took too long to clear the banks, and prices would change too much. So, residents only could only use cash, and lots of it. Foreign cash was made illegal, though thriving “parallel” and “black” markets saw plenty of US Dollars and South African Rand. The government attempted to control inflation with price limits and limits on cash. In 2007 they even declared inflation illegal, for what that was worth.
In once case, our friends needed to pay for a new roof. To pay for it, they literally collected 250 pounds of Zim dollars (in billion dollar bills) into a footlocker, two large suitcases, and several cardboard boxes. They then trucked the money to the vendor, who took several hours to count the money – during which time prices changed. In this kind of world, everyone has bill counters.
To exchange US or other foreign dollars, even law-abiding citizens needed to use the grey
“parallel” market, or, if they dared, the “black” market. These arrangements involved friends with international businesses with foreign accounts, who essentially laundered dollar exchanges in with offshore accounts and other transactions.
Only government officials had access to the central bank’s special rate (see graph above). With this political access, the officials were able to make money for free with what I would call “political arbitrage.” Here’s how it would work for one of these officials with access to the bank rate:
  1. Exchange $1000 US Dollars at the street rate into $50 Trillion Zim Dollars.
  2. Use your influence to get into the central bank
  3. Exchange $50 Trillion Zim Dollars at the bank rate into $5000 US Dollars.
  4. Profit = $4000 US Dollars.
Technically, they take advantage of the gap between the red line and the blue line in the graph above. They could repeat this cycle over and over.
Murray Rothbard makes clear in his little book, that if inflation happened fairly and instantaneously, it wouldn’t be a problem for anyone. The problem with inflation is that the process benefits the banks and government at the origin of the money-printing, but harms everyone else. Mugabe’s government got the immediate benefit of the printed dollars and spent them immediately. The banks who got those dollars were able to use them right away before prices adjusted much. As in the arbitrage example above, people with access to the privileged rates can play the system.
Ordinary people, with savings trapped in Zim dollar-denominated accounts and fixed incomes, are essentially taxed. Wages could not keep up with rising costs – for example, a loaf of bread would cost 20 billion ZD, but the average salary would lag behind at only 100 billion ZD a month. The death toll from poverty probably outstripped any of Mugabe’s death squads.
Speaking of limits, my time and space are up. My next Zimbabwe installment will cover social, immigration and survival aspects of the inflation, and a wrap-up of where the country stands now.
The Zimbabwe monetary experience may seem remote, even freakish, to the western viewer. However, the experience bears the classic hallmarks of hyperinflation across many countries and across history. It is not a fluke, nor is it simply attributable to Mugabe’s peculiar charm.
And speaking of evil, it is time to announce the month’s heavy metal song. After all of this dictator stuff, I’m in the mood for “Rise, Rebel, Resist” by Otep from their 2009 album “Smash the Control Machine.” The lead singer, Otep Shamaya, surely has poison coursing through her veins and breathes fire through her vocal cords. Listen to her slay a heckler who asked her to “take it off” in this clip.
We need more people like her. Oh wait, we have Zoe.
– Pasha


About the Author: admin

Precious Metalhead #2: QE Lite, Zimbabwe, Otep

August 10th, 2010

I write this month’s Precious Metalhead in the shadow of unusual uncertainty around today’s Fed meeting. In fact, I am racing Bernanke – the Fed announcement is expected at 2:15 today. The sugar-rush of short-term stimulus is wearing thin, the recovery is stagnant, and the Fed is trying to engineer their way out of a second major dip.
Personally, I’ve been gunning for the double-dip for years now… but in an election year with much at stake, the Fed and DC insiders really need a “V-shaped” recovery with a rapid return to whatever they consider normal. The problem, of course, is that their “normal” is about as hyper-levered and sugared-up as a big bowl of Cocoa Pebbles. In reality, we still have a lot of de-levering to go.
The markets have geared to expect another round of “Quantitative Easing,” a fancy name for printing money. The word on the street calls this “QE lite,” as if inflation were a diet, but with QE2 we will now be back to printing money to ward off deflation and stagnation.
With this backdrop, I’m pleased to deliver part one of my report on Zimbabwe. Here at Silver Circle, we are studying real-world inflation disasters to find out what REALLY happens, socially, individually, and economically in these extreme situations. We have had two major episodes in the last decade – Argentina and Zimbabwe – and I was fortunate enough to track down some Zim natives during a brief stay in the United States. They agreed to an interview as long as I assured anonymity.
Zimbabwe is now finishing a chapter of textbook hyperinflation, culminating in a 231 million percent inflation rate in 2008. In our movie, we have very high inflation, but nothing resembling the strange physics of hyper inflation. We will leave that for a sequel.
Zimbabwe politics are extreme. The president-dictator Mugabe rewrote the constitution in 1987, and again in 1990 to cement his power. Try that in the US. Rather than chronicle the history of this tragedy, I will focus on the monetary disaster here. Suffice it to say that historically, the chaos induced by heavy inflation requires a heavy-handed state.
Up through 1997 the Zim dollar experienced solid inflation, 14-25% per year, same as in Silver Circle. My friends took this in stride – they characterized this as normal. Here in the US, we tend to experience 2-5% per year, and have had peaks of around 15% in 1979 and 1946.
Amid political turmoil in 2000, the central bank of Zimbabwe began to inflate heavily, which led to a feedback loop effect, creating the need to print even more money. Inflation rose exponentially, peaking at 231 million percent a year in 2008. Prices would change daily and even hourly.

USD-Zimbabwe Exchange Rate (note the exponential scale)

Quickly, credit cards and checks disappeared from use – they took too long to clear the banks, and prices would change too much. So, residents only could only use cash, and lots of it. Foreign cash was made illegal, though thriving “parallel” and “black” markets saw plenty of US Dollars and South African Rand. The government attempted to control inflation with price limits and limits on cash. In 2007 they even declared inflation illegal, for what that was worth.
In once case, our friends needed to pay for a new roof. To pay for it, they literally collected 250 pounds of Zim dollars (in billion dollar bills) into a footlocker, two large suitcases, and several cardboard boxes. They then trucked the money to the vendor, who took several hours to count the money – during which time prices changed. In this kind of world, everyone has bill counters.
To exchange US or other foreign dollars, even law-abiding citizens needed to use the grey “parallel” market, or, if they dared, the “black” market. These arrangements involved friends with international businesses with foreign accounts, who essentially laundered dollar exchanges in with offshore accounts and other transactions.
Only government officials had access to the central bank’s special rate (see graph above). With this political access, the officials were able to make money for free with what I would call “political arbitrage.” Here’s how it would work for one of these officials with access to the bank rate:
  1. Exchange $1000 US Dollars at the street rate into $50 Trillion Zim Dollars.
  2. Use your influence to get into the central bank
  3. Exchange $50 Trillion Zim Dollars at the bank rate into $5000 US Dollars.
  4. Profit = $4000 US Dollars.
Technically, they take advantage of the gap between the red line and the blue line in the graph above. They could repeat this cycle over and over.
Murray Rothbard makes clear in his little book, that if inflation happened fairly and instantaneously, it wouldn’t be a problem for anyone. The problem with inflation is that the process benefits the banks and government at the origin of the money-printing, but harms everyone else. Mugabe’s government got the immediate benefit of the printed dollars and spent them immediately. The banks who got those dollars were able to use them right away before prices adjusted much. As in the arbitrage example above, people with access to the privileged rates can play the system.
Ordinary people, with savings trapped in Zim dollar-denominated accounts and fixed incomes, are essentially taxed. Wages could not keep up with rising costs – for example, a loaf of bread would cost 20 billion ZD, but the average salary would lag behind at only 100 billion ZD a month. The death toll from poverty probably outstripped any of Mugabe’s death squads.
Speaking of limits, my time and space are up. My next Zimbabwe installment will cover social, immigration and survival aspects of the inflation, and a wrap-up of where the country stands now.
The Zimbabwe monetary experience may seem remote, even freakish, to the western viewer. However, the experience bears the classic hallmarks of hyperinflation across many countries and across history. It is not a fluke, no
r is it simply attributable to Mugabe’s peculiar charm.
And speaking of evil, it is time to announce the month’s heavy metal song. After all of this dictator stuff, I’m in the mood for “Rise, Rebel, Resist” by Otep from their 2009 album “Smash the Control Machine.” The lead singer, Otep Shamaya, surely has poison coursing through her veins and breathes fire through her vocal cords. Listen to her slay a heckler who asked her to “take it off” in this clip.
We need more people like her. Oh wait, we have Zoe.
– Pasha


About the Author: admin