In June 2015, Zimbabwe began offering an exchange of $5 US dollars for $175 quadrillion Zimbabwe
dollars.
In 2008, their rate of inflation hit 500 billion percent, and soon after, Zimbabwe abandoned
their currency.
So, how did it get so bad, and what exactly is inflation?
Well, often inflation is described as “too much money chasing too few goods”.
What this means, is, if there’s too much physical currency floating around in the economy,
then the money’s worth is diluted.
Inflation and DEflation, are tightly regulated by the government.
And if they weren’t, unchecked inflation of currency could lead to market chaos.
In severe cases, a person’s life savings could become essentially worthless.
There are many variable factors that play into inflation.
One, is the confidence that users have in their currency.
Ever since the gold standard was abandoned, money stopped having real worth, based on
precious metals.
So, modern currency only has value because the government, and its citizens say it does,
and they believe in it.
However, when the guarantee of that money’s value by the government is threatened by something
drastic, like war, it loses some intrinsic value.
Another factor that affects the value of money is defined by the ratio of buying and producing
in the economy -- or “supply and demand”.
In a year, let’s say, if everyone bought the exact amount of goods and services which
were produced, this ratio would be 1 to 1, and there would be NO inflation or deflation
of prices.
HOWEVER - if more or less goods are produced than normal, or, more or less people want
to buy them, prices can fluctuate.
The Federal Reserve keeps watch of inflation patterns, via long-term “price indexes”
or the change in inflation rates for various categories of products.
The “CPI” or Consumer Price Index, and the “PPI”, or Producer Price Index, are
two commonly used measurements.
One looks at how much consumers are paying for products, and the other looks at the prices
listed by the producer.
Without government regulation, an imbalance in a market’s supply and demand can be exacerbated
by a lack of public confidence in the currency.
When that happens, “hyperinflation” or “hyperdeflation” may occur - and normal
items can wind up costing either a fraction, or several hundred times what they normally
do.
For instance, when Germany was struggling to pay its World War 1 debts in 1923, their
currency lost investor confidence, and went into hyperinflation.
According to reports back then, a simple newspaper cost a wheelbarrow full of German Marks.
For Zimbabwe, the worst of their hyperinflation woes are past.
But even presently, many continue to improvise their currency, by giving change in things
like: pens, candy, and bubble gum.
Soon, hopefully, Zimbabwe’s currency will stabilize, and people can continue to grow
the market economy with an effective system of money.
If you’re interested in learning more about Zimbabwe and the situation there, check out
our video about the racial struggles between black and white farmers.
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