Zimbabwe stock exchange resumes trading, in US dollars

The instant I saw this headline, I broke down laughing. As you might have head, Zimbabwe is suffering from hyperinflation. Their solution to this problem, apparently, is switching to the US dollar. Somehow, I don't think this decision will work out too well...


Yahoo News reports that Zimbabwe stock exchange resumes trading, in US dollars.

(emphasis mine) [my comment]

Zimbabwe stock exchange resumes trading, in US dollars
Thu Feb 19, 8:03 am ET

HARARE (AFP) — Trading resumed Thursday at the Zimbabwe Stock Exchange (ZSE) after a three-month suspension but transactions were carried out only in US dollars, the first time in President Robert Mugabe's 29-year rule. [This is a very nasty prank President Mugabe is pulling on his people!]

Trading on the ZSE floor was suspended in November at the instruction of the Reserve Bank of Zimbabwe due to some traders using dud cheques and activities of market speculators, brokers said.

New Finance Minister Tendai Biti, whose Movement for Democratic Change party joined Mugabe in a unity government last week, witnessed the resumption of trading.

As a result of stocks being traded only in US dollars, Apex, an engineering and stationery firm, was the only trader among the more than 80 officially listed at Thursday's session, an AFP correspondent saw.

The company sold 3,026 shares, each for one US cent.

It was the first time stocks were traded in US dollars since Mugabe came to power in 1980, brokers said.

Zimbabwe is buckling under economic meltdown,
characterised by world's highest inflation last officially put in July at 231 million percent. [231 million percent! Now THAT is real hyperinflation]

Share prices went up 3,500 percent last year due to hyperinflation.
[This is what hyperinflation does to stock prices, but you have to buy the right stocks (ie: companies that will survive).]

Individuals and companies are now expected to open forex accounts to enable them to trade in shares.

Zimbabwe's new government took its first step towards rebuilding the shattered nation Wednesday, honoring a pledge to civil servants by paying them in US dollars to counter the impact of the inflation. [Getting payed in dollars is probably NOT the best way to "counter the impact of the inflation"]

Last month,
Mugabe's government announced that Zimbabweans can now legally use foreign currencies alongside the local dollar when presenting the 2009 budget in both foreign currency and the local unit.

Trading is expected to continue on Friday at the ZSE which was established in 1896.

My reaction: The poor people of Zimbabwe! They must be under the illusion that they have finally escaped hyperinflation. Unfortunately, with the US dollar's collapse imminent, hyperinflation looks set for another comeback... Anyway, here are the key points to the story:

1) Trading resumed Thursday at the Zimbabwe Stock Exchange (ZSE) after a three-month suspension with transactions carried out only in US dollars.

2) Zimbabwe honored its pledge to civil servants by paying them in US dollars to "counter the impact of the inflation".

3) Zimbabweans can now legally use foreign currencies alongside the Zimbabwe dollar.

4) Zimbabwe is buckling under economic meltdown, characterised by the world's highest inflation at 231 million percent last July.


Conclusion: You have to feel sorry for those in Zimbabwe. After suffering years of hyperinflation, they switch to a foreign currency right before that currency collapses.

My advice to Zimbabweans: in the future, avoid any currency named "the dollar".


Finally, to give you a good idea about what the people of Zimbabwe have been through, here are two comments on a message aboard about hyperinflation:

(emphasis mine) [my comment]

Quote:
1. what happens to our 401k savings during hyperinflation? Does it go POOF for good or does it somehow convert over to the new currency?

My guess: It probably starts out by going up. The rise in the Dow/S&P;/Nasdaq over the last few years is in part simply due to the value of the dollar going down. Kind of an "inflation rally". The Zimbabwe market was up 600% and some change in 2006, IIRC. But
think of it as the best performing market on the planet that no-one wanted to buy into. $100k in stocks may balloon to millions, but those millions can't/won't really buy anything of value, because the cost of everything tangible goes up as fast or faster. The pain that inflation causes companies means that many/most of them start going under. When that happens, they plummet in share price on the stock market. Late stage you may see your 401k saving go POOF, as the brokers/banks/settlement houses/markets simply collapse and shut down.

The final stage most likely involves implementation of a new currency
[What Zimbabwe is trying to do now with the US dollar]; hopefully backed by gold/silver. I doubt they'll care about converting individual's old amounts into much in the new stuff; just be happy you're alive, take your new shiny credits, and get back in the soup line.

Quote:
2. If we have a 200K mortgage, will that also increase along with the hyperinflation rate?

Maybe. I seem to recall that some of the loan debt during the Weimar days got "reset" upwards for a time. Eventually the companies interested in doing it just give up. No collection calls if you haven't been paying your mortgage, 'cause the mortgage servicing company is out of business too.


There is a real moral hazard situation that goes hand in hand with hyper-inflation. Mathematically, the smartest thing you can do during the onset of hyperinflation is to borrow out the wazzo. This presumes that the aging of the debt will make it trivial to pay off in the future, or even be "disappeared" by failure of the system. This is where people start getting strongly tempted to borrow today to buy PMs
[PMs = Precious Metals] in anticipation of tomorrow.

I admit it is a temptation I deal with monthly. It's my own "tee-totaler eyeing up a bottle of booze" situation.

Reasons that have kept me from doing it to date:

1) I don't like borrowing. Never have, never will. Just the way I am. Some of the greatest angst in my life has come from fretting about personal liabilities, and the most relaxed times have been after I finally managed to get out from under the monkey.

2) There's no telling exactly what the government/world will end up doing in response to a collapsing dollar crisis. The world may very well choose to arbitrarily "fix" or "freeze" all currencies to some set rate. They may invent an entirely new currency, say "screw the entitlement programs", and sidle right by catastrophe. My gut tells me the banks are ultimately at the helm, and they will not give up what they feel is owed them without a fight.

3) My paltry PM stack may actually be enough to get me through the rough times. My goal has never been to be the rich fat cat who buys up entire subdivisions after the fall; I just want to be in a better position than the average bear. By buying PMs when and as I can, free of any debt obligation, I think I've got good odds to pull through better than most people, who wouldn't recognize a silver/gold coin at present.

They'll learn.


One final tidbit: Near the end of the interview, John Williams speculated that the reason the ECB has been such a stick in the mud about refusing to lower their interest rates is that
the ECB at present is dominated by Germans, and those Germans are still, to this day, terrified about the prospect of another Weimar.

Second comment:

Quote:
Look at current day Zimbabwe. Hyperinflation means that there's pretty much no banking system left, except for the government run printing presses. No credit cards, no home loans, no student loans. No ATMs, no checks, no money orders. Nada.

One of my graduate school classmates is from Zimbabwe. He has a 10,000,000, yes that is million, dollar bill hanging above his office computer. He said that is practically worthless. He estimates that inflation is at least 250,000%. Though he lives here now for school, he owns a store with his brother in Zimbabwe.
He said the key lesson is NEVER go to bed with cash. Buy SOMETHING. Food, oil, etc. Its a real real mess.

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7 Responses to Zimbabwe stock exchange resumes trading, in US dollars

  1. Anonymous says:

    I just want to say that I really enjoy your willingness to reveal to us, the laymen, about the facts of this economic crisis and what is going on in the economic systems around the world. And how both these things will affect not only the quality of life for every American, but also the hegemonic power of the American dollar.

    The information that you proved here is invaluable to those that have the resources to prepare for this, and allow those that don't to get mentally prepared.

    But I do have one question: When can we expect the final collapse to occur?

    None have been able to predict this or are unwilling to give a time frame. The best I have been able to come to is on your site where you stated to watch for when gold rises above (a sustained) 1,000 and keeps rising. Which seems to be getting very close now.

    But something tells me that this final collapse could take some time, as much as three years. And yet it would be foolish for anyone to discount the power of the fed and their ability to stave off any reproductions of their actions. Yet, America always has its military force to ensure that America's world power hegemony could extend past the near future and into another generation or more.

    I would love to know a time frame Eric, even if a subjective one. And no I will not hold you to it... Just let me, us, know how long we have left before things start to go all crazy.

  2. Anonymous said...
    But I do have one question: When can we expect the final collapse to occur?

    Within the year, guaranteed. (with gold prices surging, I would say it is happening already)

    Here are the reasons a dollar collapse is guaranteed to happen in the next ten months.

    1) Europe financial collapse can't be delayed more than a few months at best.

    A) When Europe's financial system collapse, the euro money supply will shrink fast, making the euro more valuable and ending the dollar's rally.
    B) Also, when Europe's financial system collapse, it will trigger trillions in losses for US banks who guaranteed the debt of European banks. This will force the fed to print trillions to monetize these loses.

    2) The global drought and dropping food productions will impact prices in the next few months.

    3) The frozen US money supply. I keep hearing about or talking to people who are panicked and are sitting on huge piles of cash. These people fear deflation. Any rise in prices (food for example) or fall in the dollar would shake this belief. As those frozen piles of cash come back into circulation, it will fuel a big rise in prices.

    4) There is no way in hell confidence in the treasuries can last a year.

    If there is a loss of confidence in treasuries, there will be no "safe" dollar assets left to hold, and central banks/investors will start to diversify away from the dollar (buying commodities/gold/foreign currencies). Look at the entry I just made with the charts of the bailouts and the US's deficit. Imagine how bad that is going to look as time goes on. How long do you think faith in the treasuries can last in the face of an economic picture that grows worse every month?

    To believe that the dollar will not collapse over the next year, you have to also believe that treasuries will not collapse over the next year. I find that impossible to believe.

    5) The dollar's situation is unique: It is the world's reserve currency. With the US's fundamentals growing worse every month and with other countries (like China) showing signs of recovery, the dollar's reserve status is unlikely to survive another year. Other currencies and gold will increasingly be used as a substitute for the dollar.

    6) The threat of Gulf nation's new gold backed currency set for 2010.

    7) The threat of China's yuan as it becomes an international currency.

    8) China's currency peg won't last another six months. As I wrote in my piece about "Hyperinflation beginning in China", there is no way china can print 240 billion yuan a month (because of trade surplus) while encouraging loan growth and domestic spending without causing a wild outbreak in inflation. This outbreak would force china to appreciate the yuan.

  3. Jo Jordan says:

    You need to calm down.

    The facts in Zimbabwe are somewhat different from what you state. First the new Minister of Finance and Prime Minister are from the opposition. This is their call. The move to USD provides value. It also stops central governement playing games. For example, if Brits don't want their govt to print money, they could always adopt the Euro.

    Secondly, the value of currencies are relative. You can only make predictions on the basis of fundamentals that will not change in their own right or in interaction with other fundamentals. It is easy to predict the collapse of a newly independent African country. Prior to independence, Zimbabwe was run for the benefit of 250K whites. When the country was opened up for 6m people to live equally, a juggling act began. That 4000 commercial farms did not change hands for 20 years also predicated this poltical crisis. These are numbers and ratios that are so extreme they have predictive value.

    The USA is at its zenith. Everyone understands that. You've made excitable and unwise decisions. Everyone knows that and has been telling you that! Begin with a deep breath and say, world you were right.

    This is a midlife crisis. You are no longer young and virile. You are slightly podgy around the middle. You've picked up some bad habits. You need to take some expercise and begin to "act your age" - which means being respectful to the countries coming into their prime.

    You ain't done. You are beginning but as a mature entity in the world. The Economist is debating you right now, BTW. You an log in for free!

    Personally I've never had any desire to live in the States but I have been impressed in the last year by your political process. You've earned admiration in the world. You have worked so quickly in the last month, if you asked people how long you've had the new administration, they would say years not weeks.

    So yes, educate me about the economy - but calm down. Or you will get like Zimbabwe. They've had a failure of political process first and foremost. Don't ask me why people there prefer to benchmark in USD - they do - even when the value was low. Commodities must be priced in USD or something.

    Have a winning weekend!

  4. Brian says:

    Eric,

    Can you give some advice on what people should and shouldn't be doing in this pre-HI environment?

    Should we be maxing out credit cards to load the boat with metals? How about discretionary spending? I've been thinking about buying a (70 mpg)motorcycle to counter the price of oil when it eventually goes back up. Is that smart?

    Maybe you could write a small Dos and Don'ts for this economic environment.

    Best Regards,

    B

  5. Yohay says:

    It's not only hyperinlation. It's also a dictatorship and civil unrest for over a year, since the disputed elections.
    They suffer.

  6. Anonymous says:

    How about them rising treasury yields! Where's Jo Jordan now? LMAO

    Ed in CA
    Financial Advisor in CA

  7. Melinda says:

    I am Douglas Cornish and I think that since there is an exchange, why doesn't Zimbabwe revert to each corporation issuing their stock shares in the form of a single unit of currency, each corporation with their own coupons representing one unit of stock. That way if there is inflation, the company will be able to produce more of their goods for export bring the standard metropolitan statistical area up in value. etc. etc. etc!

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