Zimbabwe could be retracing road to hyperinflation

zimbabwe-bond-notes

Zimbabwe introduced a new currency Monday, but citizens of the foundering African nation aren’t exactly embracing the so-called “bond note” money.

Zimbabwe has been operating to a large degree on US dollars since 2009, after the Zimbabwe dollar was abandoned following some of the worst inflation in world history – peaking at something akin to 500 billion percent – that left residents barely able to buy such items as a single egg with a 1 billion dollar banknote.

The government introduced the new currency in the form of 1 dollar bond coins and 2 dollar bond notes to address the shortage of US dollars and to boost exports. But many say they aren’t buying into the government’s plan.

“They are only giving us bond notes because they don’t have real dollars,” Lovemore Chitongo, 40, a shoe salesman in Harare, told Agence France-Presse. “There is no way the bond note will be equal to the US dollar. The market will determine the exchange rate.”

Proof that government dictates and reality often don’t match up could be seen in the fact that Chitongo was charging $20 in US dollars per pair of shoes but 25 dollars in bond notes.

He would use the difference to buy US dollars on the black market, he told AFP.

What will shortly begin happening in Zimbabwe if citizens lose confidence in the new currency is that bond notes will be refused, or, if citizens are legally required to accept them, they will keep the US dollars and pass the bond notes on to someone else as quickly as possible.

Following the collapse of the Zimbabwean dollar in 2009 the country switched to a multi-currency system, according to Newsweek. At least nine currencies are now legal tender in Zimbabwe: the US dollar, the South African rand, the euro, the British pound, the Australian dollar, the Botswana pula, the Japanese yen, the Indian rupee and the Chinese yuan.

Not all are accepted by Zimbabwean traders, however. The US dollar is the most widely-used currency.

Zimbabwe’s economy collapsed under President Robert Mugabe’s chronic mismanagement. The nation’s leader since 1980, Mugabe sped redistribution of Zimbabwe’s farms from white landowners to blacks through forced confiscation beginning early last decade. Coupled with corruption and misconduct, droughts and an AIDS crisis, the nation of 13 million collapsed economically in 2009.

In fact, inflation was so bad it’s not certain whether anyone knows the exact rate at its peak.

While Zimbabwe officials cited an official inflation rate of 11.2 million percent in August 2008, the International Monetary Fund stated the country was suffering from 500 billion annual inflation rate and Newsweek asserted that Zimbabwe’s inflation rate reportedly peaked at “around 90 sextillion percent – or nine followed by 22 zeros.”

In an effort to win citizens to the new currency, the central bank recently launched an advertising campaign trying to allay people’s fears, saying retailers and businesses had agreed to accept the new currency.

However, opposition to bond notes has sparked fierce anti-government protests which have resulted in brutal police crackdowns.

Police on Monday broke up a protest planned by the pressure group Tajamuka in Harare and arrested the group’s spokesman, according to Agence France-Presse.

“The government is only treating the symptoms without attending to the problems,” Antony Hawkins, an economist at the University of Zimbabwe’s Business School, told the wire service. “We are not earning enough foreign currency and bond notes are not going to solve that. It will make the situation worse.”

In past few weeks, many Zimbabweans slept in lines outside banks so that they would have a better chance to withdraw US dollars from their accounts. Many are concerned that their US dollars were going to be converted into bond notes.

Banks, however, put severe limits on daily withdrawals, just $50 a day, up to $150 a week.

“I will take payments in bond notes but the big question is what do I do with them since some shops are refusing to accept them?” Lewis Mapira, a taxi driver in Harare, told AFP.

(Top: A Zimbabwean holds up 2 dollar bond notes, which began circulating Monday.)

Cotton bonds: 20th century finance in 1863

erlanger cotton bond

The depth and breadth of the New York Times’ Disunion series never ceases to amaze. The articles focus on the War Between the States, but go far beyond examinations of battles and leaders, delving into an amazing array of topics, including the medical, legal and financial aspects of the 1861-65 period.

Recently, Disunion, which is written by a variety of historians, academics and other individuals knowledgeable on specific aspects of the war, focused on the ingenious concept of cotton bonds, financial instruments issued by the Confederacy in 1863.

In January of that year, the Confederate Congress secretly authorized bankers at the noted Paris-based financial house of Erlanger et Cie. to underwrite $15 million of Confederate bonds, to be denominated in British pounds or French francs.

“But unlike ordinary bonds backed only by the faith and credit of the issuing country, at the option of the holder an Erlanger certificate could be converted into a receipt for a pre-specified quantity of cotton,” Phil Leigh writes for Disunion.

This was important because Confederate currency was all but worthless in Europe at that point of the war.

The conversion rate for the cotton bonds was fixed at 12 cents a pound, regardless of the commodity’s market price, at the time about 48 cents. In addition, the bonds paid a 7 percent annual interest rate.

Continue reading

‘If it’s too good to be true…’

The $50 billion fraud allegedly perpetrated by Wall Street businessman Bernard Madoff is just the latest installment of the good ol’ Ponzi Scheme.

Named for Charles Ponzi, an Italian immigrant who fleeced thousands of Americans nearly a century ago, a Ponzi or pyramid scheme lures investors by paying abnormally high returns on money paid in by subsequent investors, rather than from the profit from any real business.

When the scheme ultimately collapses, which it always does, the most recent investors lose everything.

While the Madoff case may be one of the highest-profile Ponzi schemes ever, it’s by no means an isolated incident. In South Carolina alone, numerous examples have been uncovered in recent years.

Among the best known: Carolina Investors, a Pickens-based investment company, that cost 8,000 investors a total of $278 million when it collapsed in 2003; and former Charleston Southern economist Al Parish, who was found guilty earlier this year of defrauding investors of $66 million.

Keep your eyes peeled because it’s all but guaranteed that yet another Ponzi scheme will make the news before long. Folks just can’t seem to resist the lure of easy money.