230,000,000% inflation to 1%...HOW?!

From FP Passport:

After a complete economic collapse, inflation last year about this time had reached 230 million percent; GDP "growth" was negative in all senses of the word. It was in this nasty environment that the new finance minister, Tendai Biti, came along and began what few would argue is the hardest job in the world.

Now less than a year later, he was in Washington to tally the progress (and damn, Milton Friedman would be proud...)

- Inflation is completely gone, thanks to the abolition of the Zimbabwean currency in favor of a basket of other notes (including the dollar and the South African Rand). The highest rate seen in 2009 was a slim 1 percent.

- The money supply has been cut by 1,000 percent -- effectively decapitating a nasty forex trade that the money-printers were previously using to enrich themselves

- Capacity utilization in the economy is up from 4 percent to nearly 50 percent, with some industries, including food and beverages, as high as 95 percent.

- GDP growth this year was probably around 4 percent; Biti expects 6 percent in 2010.

Of course, it's not all rosy. But just think about that for a second: the world's most free-fall economy -- the only one in history to see negative economic growth for a decade in which it was not at war -- today is almost normal. In fact, it has the largest stock exchange on the continent, capitalized at $4 billion.

Biti has an interesting theory about this. The collapse of the economy, he said today at a Freedom House event, was in fact the reason why President Robert Mugabe's government finally had to accept the power-sharing agreement in the first place. "Everything else they could deal with -- the opposition, they could beat us up," he said, "but you cannot implement violence against the economy."

That's a pretty damn impressive turnaround.

Zimbabwe introduces new $50 billion note

From CNN.com:

Zimbabwe's central bank will introduce a $50 billion note -- enough to buy just two loaves of bread -- as a way of fighting cash shortages amid spiraling inflation.

The country's acting finance minister, Patrick Chinamasa, made the announcement in a government gazette released Saturday.

While Chinamasa did not give the date on which the $50 billion and new $20 billion notes would come into circulation, an official at the Reserve Bank of Zimbabwe said the notes would be distributed to all banks by the end of Monday.

Zimbabwe is grappling with hyperinflation, now officially estimated at 231 million percent and its currency is fast losing its value. As of Friday, one U.S. dollar was trading at around ZW$25 billion.

When the government issued a $10 billion note just three weeks ago, it bought 20 loaves of bread. That note now can purchase less than half of one loaf.

Realizing the worthlessness of the currency, the RBZ has allowed most goods and services to be charged in foreign currency. As a result, grocery purchases, government hospital bills, property sales, rent, vegetables and even mobile phone recharge cards are now paid for in foreign currency, as the worthless Zimbabwe dollar virtually ceases to be legal tender.

Under these circumstances, most, if not all, consumers would flock to hold and do business only in foreign currency. Their domestic currency can not hold its value, so these people would do best by refusing to hold any Zimbabwean currency and instead try to pay for goods and services using foreign currency (if they can get their hands on any of it) or turn to bartering.

This reminds me of hearing stories about Argentinean grocery stores in the 1990's. Shop owners stopped labeling the prices of grocery items on the shelves because by the time a customer would pick up the item and walk it to the counter to pay, the price would have gone up. Customers would walk in, literally, with a bag of money and try their best to grab the item and run to the counter before it went up in price. 

It is difficult to watch this situation develop in an extremely poor, African country. With more than 80% of the working age population unemployed, one of the lowest standards of living in Africa, a dysfunctional government and economic system and rampant hyperinflation, how can people survive? The vast majority of these people do not have access to foreign currency and can not find work to try to earn even the most modest of wages. This is where a modern economy spirals backwards into the realm of a 16th century barter economy. This is painful to watch. How can any of this be possible in the 21st century?

Zimbabwe Update

Inflation hits 7,638%