Sunday, April 6, 2008

How to Get a Grip on 165000%?

No, I have not died of blogging.

With it looking increasingly likely that Mugabe et al won't be back in their offices, the difficult but rewarding task of trying to fix Zimbabwe will fall on someone's shoulders. One of their first priorities will be to fix the hyperinflation that's officially measured at about 165000% - unofficially, higher still.

A daunting prospect. Right now, money is halving in value each month. Unfortunately, this is a problem that's perhaps impossible to solve in the short term through simple application of monetary policy. What needs to be done is to control expectations.

That's typically referred to as 'shock therapy', the idea of jolting the economy sufficiently to do a hard reset, if you will - wipe away the past, and start a clean economic slate. The phrase comes from the successful (at least inflation-wise) Sachs-promulgated reforms in Bolivia in the mid 1980s, but I think I recall reading that he wasn't a big fan of the term. I'm looking forward to seeing how this case of hyperinflation can be stamped out - one more severe than what Sachs had to deal with.

In the relevant AER article, there's a neat little passage:
By August 1985, the US dollar and not the Bolivian peso was satisfying two of the three classic roles of money: the unit of account and the store of value (thought it was not the medium of exchange for most transactions). Prices were set either explicitly or implicitly in dollars, with transactions continuing to take place in peso notes, at prices determined by the dollar price converted at the spot exchange rate. Therefore, by stabilizing the exchange rate, domestic inflation could be made to revert immediately to the US dollar inflation rate!

Since it's a matter of fact that some combination of the US dollar and the South African rand meet these conditions once again, this hypothesis, which I think has a good deal of validity, will be tested rather rigorously. Will we see 25% inflation inside a year? Entirely possible. Inflation is one of the things macroeconomics does well.

POSTSCRIPT: Locals, take in this years John Kenneth Galbraith lecture, given by the Prime Minister of Iceland.

No comments: