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]
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.
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.
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.
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.