Dateline: Krakow, Poland
Imagine being a “starving billionaire”. Here in Poland, those who know their history know a little something about hyperinflation.
After the dust of the Cold War had settled, the Polish government recalled the Polish zloty that had been in circulation for nearly a half-century, issuing one “new zloty” for every 10,000 “old zloty”.
As currency revaluations tend to be, it was a stark reminder that something had gone dreadfully wrong in the country’s monetary system. In fact, this was actually the fourth revaluation of Poland’s currency since the golden coins issued by Polish-Lithuanian forces in the Middle Ages.
Back in 1950, the third Polish zloty replaced its predecessor at a rate of 100 to one. That means that in the course of 45 years, the value of a zloty was revalued by 1 million to one.
We’ve seen similar – and much greater – revaluations in countries like Turkey, where the central bank simply lopped off six digits from the “old lira”, issuing the “new lira” that those of us who love visiting Istanbul know today.
Of course, lopping off a few zeroes from your currency doesn’t solve the underlying problems in an economy any more than declaring your mortgage balance to no longer be $200,000 but $2,000 does. Just ask modern-day Venezuela:
The most outrageous hyperinflation story of the modern age, however, is invariably that of Zimbabwe.
Back in 2008, Zimbabwe experienced a period of hyperinflation that led to the creation of the now-storied $100 trillion bill seen above. Inflation was so bad – about 231 million percent annually – that stores updated prices denominated in the local currency multiple times PER DAY.
Imagine walking into a store and seeing a loaf of bread for $100,000 in the morning… then $120,000 at night.
Even worse, imagine money inflating so quickly that stores don’t even bother to give out change, but rather hand tiny candies out in lieu of cold hard cash. They already do this in Vietnam.
As you can imagine, all savings, investments, and pretty much any other source of wealth was wiped out as Zimbabweans resorted to pushing their life savings around in wheelbarrows to buy food.
That is, those that could afford to: the mega-inflation was largely responsible for unemployment rates of up to 80%.
Today, however, the Zimbabwe government has a solution. Nearly seven years after the locals decided to trash their toilet paper currency and trade amongst themselves in US dollars and South African rands, the Zimbabwe central bank is offering to buy back the worthless fiat currency at a rate of five US dollars for every $175,000,000,000,000,000.
In case you have trouble counting that high, that comes out to $175 quadrillion dollars for each wrinkled Abe Lincoln. If you have a higher balance – yes, higher than all of $5 – you’ll be able to receive one dollar for each $35 trillion Zimbabwe greenbacks you turn in.
It’s ludicrous; the free market largely solved this problem years ago as consumers realized there was no possible way their government masters could prevent them from becoming even more broke than they already were. The only people with local currency left are those with savings accounts.
Nobody is using the old dollars anymore, but leave it to the government to pretend they are coming in to wipe up the mess.
Speaking as the so-called voice of reason, the local central banker proclaimed that the country “cannot have two legal currency systems. We need therefore to safeguard the integrity of the multiple-currency system or dollarization in Zimbabwe.”
As far as I can tell, the central bank had their chance to “safeguard” their citizens’ wealth and failed miserably.
Here’s the unfortunate and all-too-common takeaway from this story: your government will all too happily create a big mess, bankrupt your family, devalue your savings, and leave you hanging high and dry…
…and when you figure out a way within your local community to overcome their malfeasance and irresponsibility, they’ll step in to claim law and order.
In Zimbabwe, the fact that eight different countries from the British pound to the Botswana pula are legal tender bothers the central bank, which calls this chaos.
To me, chaos is paying millions of dollars for a taxi ride or billions of dollars in rent. The establishment never sees it that way.
In the western world, governments are learning a lesson from Zimbabwe. For one thing, that western citizens have inordinate amounts of trust in their government… far more than the Zimbabweans (or Serbians, or Russians…) who lost it all.
For one thing, the Zimbabwe government gave up on reporting inflation statistics after they let their currency go into free fall six years ago. You could argue that is a more honest approach – simply giving up – than western governments like the United States that cook the books and ignore the real, “shadow statistics” on things like unemployment and inflation.
The government didn’t help its dreadful economy when, back in 2000, it seized white-owned farms and caused exports to plummet… the same way “stable” countries like South Africa are doing now.
Services like hospital care and other essentials have been largely shut down in Zimbabwe, just as schools and other facilities in the United States, Spain, and elsewhere are being shuttered due to forced austerity in the face of untenable budget gaps.
And then there is the crazed leader of Zimbabwe who for years has been blaming his country’s woes on a western plot against him, Hugo Chavez style. Sounds a little like the United States saying that some guys in caves are the reason there is little freedom left.
As my father is fond of saying, economies run on margins. You don’t need 231,000,000% annual inflation to go broke. In western societies where everything believes themselves to be “rich” and thus have no need for savings, one wrong move could bankrupt your entire family.
Imagine if your retirement account dropped by not 99.99999%, but just 50%. Many westerners already face having to work into their seventies and eighties, even without a currency disaster.
The same is true of your kids’ college account, your savings account, and your business. If 25%, 50%, or more of what you have was destroyed by a currency devaluation and subsequent revaluation, how would you react?
Would you be prepared?