Zimbabwe was known at one time as “Africa’s bread basket”, but unfortunately it was reduced to a state of abject poverty within only a few short years. The collapse of Zimbabwe’s economy is a case study in how a relatively self-sufficient nation can fall victim to runaway inflation and extreme wealth erosion.
Economist Phillip Cagan identified hyperinflation as beginning when monthly inflation rates begin to exceed 50 percent. Once the ravages of hyperinflation have taken their toll, it is officially declared “over” when rates decline below 50 percent, and then remain below 50 percent for at least a year. In Zimbabwe, this 50 percent threshold was crossed in March of 2007, and lasted until 2009, when the country finally abandoned its currency. Hyperinflation is typically caused by rapid increases in a country’s money supply due to fiscal deficits arising from war, regime changes, and the like.
In the 20th century alone, hyperinflation occurred 28 separate times, with the majority of the episodes brought on by war and the fall of Communism. Zimbabwe has the unpleasant distinction of being the world’s 30th occurrence, and the second occurrence of hyperinflation on the continent of Africa. It has been said before that hyperinflation is a “disease of money”, and that disease can ravage any economy in which large budget deficits are financed with more money printing. More on this in a coming post.