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Zimbabwe’s $100-Trillion Lesson for America

Posted By Ernest Istook On October 19, 2009 @ 10:46 am In Economics | Comments Disabled

zimbtrillion

Some wonder whether the stock market’s rebound to over 10,000 is a sign not of economic recovery but of inflation. Is the simultaneous rise in gold prices another symptom of dramatic inflation ahead, sparked by big government blunders?

An article at Smart Money [1] includes Jonathan Hoenig’s warning of government-caused hyperinflation. Rather than pointing to Germany’s Weimar Republic of the 1930’s, he points to Zimbabwe during the last year. That African nation printed a supply of bills valued at $100-trillion apiece—and now worthless already. Hoenig writes:

From May through October of 2008, Zimbabwean stocks skyrocketed, shooting from 72,000 to almost 400,000 by early November. . . . It would appear to be an attractive return of roughly 5,300%.

The only problem is that, while investors had indeed earned more Zimbabwe dollars, the value of those dollars over the same period had nearly evaporated amid the country’s hyperinflation, meaning the “return” was actually a catastrophic loss. One Zimbabwe dollar in May of 2008 had lost 99.99% of its purchasing power by November of that same year. Investors made thousands of percent in stocks and were still wiped out.

Another new article at U.S. News & World Report [2] notes, “Since bottoming out in March, the stock market has soared by about 60 percent, one of the most awesome rallies in market history. . . . While the Dow has been racing upward, however, the unemployment rate has also skyrocketed, from 8.5 percent in March to 9.8 percent now.”

Making sure politicians don’t use the Federal Reserve as a source of “free money” is key to avoiding inflation. It’s an open question whether the Fed can negotiate the credit market crisis without triggering inflation, a task complicated by actions of the current and past White House and Congresses.

As the Wall Street Journal’s Steve Moore told a Heritage Foundation audience this week in St. Paul, Minnesota, “For the last year, everything government has done regarding the economy has been exactly wrong.”

Any efforts to inflate the money supply—such as if the Federal Reserve printed money to supply it to government—could be dangerous steps on a Road to Zimbabwe.


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URL to article: http://blog.heritage.org/2009/10/19/zimbabwe%e2%80%99s-100-trillion-lesson-for-america/

URLs in this post:

[1] Smart Money: http://www.smartmoney.com/investing/stocks/when-big-returns-aren-t-that-big/

[2] U.S. News & World Report: http://www.usnews.com/money/blogs/flowchart/2009/10/15/why-stocks-are-surging-as-jobs-disappear

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