Hyperinflation: Where did the wealth in Zimbabwe go when their currency became worthless?

In 1983 the Zimbabwean Dollar was equal to the US Dollar, USD$1 == Z$1.
By mid-2006 it had devalued to USD$1 == Z$500,000+.
In 2008, USD$1 == Z$750,000,000,000+ (750 billion).

In 2009 the currency was abandoned altogether and the US Dollar was adopted as the official currency. The Z$ which once had value now had none, where did that value go?

For instance, let's say in 1983 two Zimbabweans each decide to put some money away for retirement. A poor farmer stuffs Z$100 into a mattress, and a wealthy business owner puts Z$1,000,000 into a savings account. By 2009 hyperinflation has reduced both of their savings plans to nothing.

The wealthy business owner may have accountants or advisors who warn him to convert his savings to hard assets before it becomes worthless. The farmer doesn't have this luxury, he and the millions of other commoners like him hold their meager wealth in cash or other dollar-denominated assets, and they all lose everything. Where did it go?

The foreign currencies being used now have value, the government of Zimbabwe obviously can't just print USD$ like they did Z$, so where did this new currency come from and how could it even get into people's hands when most of the population had been economically zeroed out?

Zimbabwe_$100_trillion_2009_Obverse"Zimbabwe $100 trillion 2009 Obverse" by Reserve Bank of Zimbabwe - Self-scan by (Marianian) followed by minor Photoshop enhancements to improve appearance and reduce size. Second version scan by (Camp0s) with original color preserved. Transferred from en.wikipedia to Commons by User:Avicennasis using CommonsHelper.. Licensed under Public Domain via Wikimedia Commons - http://commons.wikimedia.org/wiki/File:Zimbabwe_$100_trillion_2009_Obverse.jpg#/media/File:Zimbabwe_$100_trillion_2009_Obverse.jpg

Comments

  • They lost it.

    Let me rephrase - If somebody held their savings in cash, they lost it for all practical purpose due to the devalued currency. That's what inflation over time, or hyperinflation overnight, does.

    Where did the value go? The Zimbabwean government blew it up.

    How? As you rightly pointed out, they printed far too much currency.

    A country's government earns (mostly taxes) and spends (defense, education etc). General idea is for a country to loan or cut it's expenses in case it goes way overboard with it's spending. Minor differences can be taken care of by what is known as deficit financing, where you print the difference between government expenditure and income. This printing leads to an inflation, which is basically devaluation of the currency. A little inflation is a good thing because it helps the economy to move and grow.

    But in the case of Zimbabwe, they printed way too much money, mostly to finance the Second Congo War and to better pay it's army officials. This is a vicious cycle, like compound interest. Today I pay you 10k, you drive the prices up, and tomorrow you will demand 20k to compensate for the raised prices. This continued for 5 years.

    At the end of it all, the farmer's $100 note turns worthless. If there were 100 notes like that in the country, now there are a million. The wealth went to whoever holds the remaining 999,999 notes.

    If you would have seen the famous movie, 'The Social Network', it's very similar to what happened to Eduardo Saverin. He held a certain number of shares, but the company issued so many more that the number of shares he held were meaningless.

    Hard currency works that way today. It has no value by itself. Gone are the days where the Gold standard was used, when you could convert your currency for real gold anytime you wanted. In today's world, the currency's value is based on what we attach to it, and what we attach to it is based on how much of it is available.

    As for the last part, if somebody wanted to buy a hard asset in Zimbabwe during hyperinflation, they would technically need local currency. If that someone was an outsider, he would have to convert his US dollars into Zimbabwean dollars. So no matter how bad the currency devalued, it still had some value. In a hyper inflating economy you can buy local currency at highly skewed rate due to lack of faith. A farm worth a billion Zimbabwean dollar, when 1 USD = 1000ZD, could be bought for 800k USD (80% of the price) simply because the stability of the currency is worth the 20% discount.

    Disclaimer : This is a very simplified answer, without considering the intricacies of macro economics, from what I learnt in a basic International Economics course. It is not technically perfect.
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