That Zimbabwe’s currency disappeared up its own printing press we know. The last notes to roll off the line were one hundred trillion dollar ones and they were worth about enough for a weekly bus pass–at the beginning of that week not the end, so bad was the inflation. And they were also not worth enough to purchase the next batch of ink necessary to print more. So, that was the end of that currency. Since then the country has used just about any currency that people recognise as having a value not dependent upon the tender mercies of the Zimbabwean state. This week the country has issued some “bond notes.” They’re definitely not a currency, oh no, absolutely not, they are bond notes. And they’re pegged one to one against the US dollar.
Which is amusing, because the apparent reason for the issuance is the desperate shortage of actual dollar notes in the country. And you can buy those from the Federal Reserve, in pretty much any quantity you like, any time you want. I’ve been vaguely involved in doing that for some Russian banks years back when the design changed. Thus any shortage must mean that there’s a shortage not just of the physical notes but of the electronic dollars to buy them. Thus, while these bond notes are pegged one to one their very issuance is a good indication that there isn’t the one to one cash to back them (as, for example, the Scottish bank notes are backed one to one by sterling deposits with the Bank of England).
But what really caught my eye is what this says about how badly Mugabe has killed off Zimbabwe’s economy.
Zimbabwe’s central bank has started adding bond notes — printed by the government and backed by dollars — into the financial system, delivering the currency over the weekend to banks in the southern African country.
With no currency of its own, Zimbabwe allows the use of a basket of foreign exchange including the South African rand, the euro and the pound. The bond notes are intended to reduce a shortage of hard currency that has led to delays of several months in salary payments to civil servants, the military and some private company employees.
If the government has the money in an account somewhere it is very easy indeed for it to convert that into physical notes. They could have a plane delivering it within 48 hours at the latest. So, the issuance is, as above, a good sign that they don’t have it. But worse:
Initially, an amount worth $10m is being introduced into circulation in two and five dollar denominations.
That’s the thing that worries me. The pitifully small amount of the issuance.
The point being that there’s a relationship between the amount of base money (ie, coins and notes, roughly speaking) and the size of GDP it is financing. The connection is akin to, but not the same as, the relationship between base money and the wider money supply. That’s V, velocity, and here were talking about the much wider concept of how much cash do you need to finance, lubricate, how much GDP?
We’ll never get to a fixed number right for all economies. But the UK currency in circulation is some £68 billion (banknotes only, no coins) and the country’s GDP is £1.8 trillion. The Federal Reserve has some $1.4 trillionout there and the US GDP is some $18 trillion. We know that the US number is out of line as quite a lot of US cash (see above about Russian banks, it’s also used in Ecuador and Panama, they have no other currency) is outside the US. So, just to pick a number that’s lose to reality let’s say we need 1/18th cash to the economy as a whole. £100 billion to £1.8 trillion, $1 trillion to $18 trillion. Absolutely not the right numbers but close enough. And just to keep our math simple call it 20x, not 18.
So, Zimbabwe’s issued $10 million in bond notes. That’ll support a $200 million economy. Which is, in the general size of these things, a pittance. But here’s what’s to worry about. The more usual estimations of Zimbabwe’s economy are up at the $7 billion level or so. That’s still a monstrous destruction of wealth since Mugabe took power. But think how much worse only $200 million is.
Now, of course, these new bond notes aren’t the only currency circulating. People are using Rand, Dollars, Yen we’re told as well. But still–that a new currency is being issued but only in the sort of volumes that would support a small English country town for a whole country (no, really, there’s about £1,000 in cash per UK inhabitant from the numbers above so, $10 million is £7 million or so is enough to a town of 7,000 people) shows just how appallingly Mugabe has gutted the Zimbabwean economy.
You know, maybe confiscating all the land from the productive farmers then handing it to cronies isn’t the way to run a country? Who knew?