Zimbabwe: When Even the Central Bank Can't Keep Up

by: Felix Salmon December 02, 2008    
Felix Salmon

Felix Salmon

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The Reserve Bank of Zimbabwe reports:

Between the 10th and the 20th of November, 2008, total fraudulent cheques we intercepted in the clearing system had risen to $60 hexillion ($60,000,000,000,000,000,000,000).

Someone really ought to tell Zimbabwe's central bankers that there's no such thing as a hexillion. They might as well say that they've intercepted sixty gajillion dollars' worth of checks.

The word they're looking for is sextillion, as they'd know if they only read this blog. On the other hand, the number of times that someone has helpfully written out a number first in words and then in bracketed numerals has now increased to one (1) from the prior zero (0).

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This article has 30 comments:

  •  
    Dec 03 01:29 AM
    Hasn't it occurred to them to start cutting zeroes? Duh. It's standard practice with hyperinflated currencies.
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  •  
    Dec 03 09:00 AM
    I may be mistaken but I think "gajillion" has a few dozen more zeros (0s).
    Reply | Link to Comment
  •  
    Dec 03 09:38 AM
    Smarty,
    I've come round to the conclusion that no use of money created by even a temporary use of fractional reserve banking is justified EXCEPT in a hopefully rare situation where a bank or banks in a particular money decrease lending in an attempt to create price deflation for the purpose of acquiring assets at cheap prices before resuming lending. Then, competing banks in the same money system, by measuring the velocity of that money, could in principle, counter that strategy and render it a waste of time by loaning out a sufficient amount of "made from thin air money" to restore V to its former value. However, even in this case the reserve ratio would be very high. I would not be surprised to learn that de facto reserves were 100% caused ironically by the action of the offending banks, validating the ethics in this case. But perhaps not. I will post my latest version of an ethical money and banking system later. BTW, in the process, JMK's smear of gold as a "barbarous relic" has been smashed, is my hope. Simply put, the ethical issue of new money requires a temporary backing by a commodity so that the issue of that money will compensate existing money holders for dilution of their stock. Between new money issues, the entire backing commodity can be swapped out for assets. Thus no wasteful storing of consumable commodities between money issues.
    Reply | Link to Comment
  •  
    Dec 03 11:04 AM
    But to be fair to JMK, gold's chief value is its tradition as a backing for money which in turn is backed on an earlier ("barbarous"... tradition as money itself. Perhaps copper-coated lead, suitably packaged, is a better medium for exchange if we return to more primitive times.
    Reply | Link to Comment
  •  
    Dec 03 11:26 AM
    "Perhaps copper-coated lead, suitably packaged, is a better medium for exchange" - moonbat

    Don't forget the pitchforks and torches. ;-)
    Reply | Link to Comment
  •  
    Dec 03 12:22 PM
    Smarty,
    There is no need for fractional reserves, ever! In the event a bank in a particular money suspended or reduced lending in an attempt to cause price deflation for its benefit, competing banks in that money could buy the commodity backing the money at reduced prices by issuing new money thus allowing them to increase V by new non-FRB loans of their own. Moonbat very happy and ashamed of previous Zimbabwe type solution yet he points out the pro rata distributions of new money to prevent dilution of existing money stocks is a good idea whoever came up with it.
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  •  
    Dec 03 01:46 PM
    I predict black market money and banking systems in parallel to the existing legal one. Workers will be paid nominally in US dollars for the sake of appearance and taxes but in addition will receive a stable and appreciating money under the table. The Fed and US dollar will wither away in parallel with a thriving alternative economy. It seems liberty need not be granted but merely exercised creatively. Moonbat happy.
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  •  
    Dec 03 03:04 PM
    A proposed optimal money and banking system.

    1. Fractional reserve banking is neither justifiable or profitable against other money systems assuming those other systems are ethically configured (more later) 100% reserves only!
    2. The fastest appreciating commodity in the area served by the money relative to other commodities in the area should be used to back the money.
    3. As a consequence of 2.) total commodity backing should be swapped out as needed with other commodities in the area to maximize the appreciation rate of the backing commodity. Best swap price should of course be sought.
    4. New money issue should occur when the money has appreciated relative to the commodity backing it in a manner that compensates existing money holders for the dilution of their money stock at the expense of new buyers of the money. Want a thriving money business? Run it ethically.
    5. The price level in the money should increase as new money is issued but this should be easily calculable. Businesses could thus be informed how much to raise prices in advance of the new money so as to avoid losses.
    6. If loans are made properly, V should increase, Y should increase and P should decline all measured in the money under discussion. The amount of income available for savings should thus steadily increase. The money should become incredibly popular as a result. This will cause a high demand for the current commodity as exchange of this for new money is the only way to acquire new money.
    7. Remember no FRB! No loaning out of anything unless agreed upon by the saver for the length of time he agrees to.
    8. I suggest the interest be shared equally between the bank and the savers.
    9. The collateral should be sufficient to cover the principle plus the interest for the entire term. In case of default, the collateral should be sold and excess proceeds handed to the defaulter.
    10. Beware of consumer loans. Productivity increases are the only means I know to grow an economy overall.
    11. Keep track of of M, V, and P to determine Y. If Y fails to increase check your loan department. Even an increased preference for consumption should not overwhelm increases in aggregate output, IMO. V should always increase too incidentally as this is a stable money system with optimum growth potential,IMO. Increases in the expected rise in price level due to new money issues should be broadcast to all money holders so prices can be adjusted upward to avoid unnecessary losses. Aggregate output should also increase by new money issues. Available savings should not increase beyond what the new owners of the money wish to save. As that additional supply of savings is lent out, V should increase and later on Y. Perhaps increases in V are temporary despite my previous comments but aggregate output should always increase.
    12. This system should not produce the business cycle yet provide optimal increases in the money supply. Chalk that up to a concern for ethics. Give you know Who the credit that you may prosper.
    12. Suggestions and comments welcome.
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  •  
    Dec 03 04:29 PM
    Comments on Moonbat plan 1) to 12)x2

    Wow. Pretty involved. My plan would be simpler.

    1) 'Money' is whatever two people agree it is between themselves.
    2) A 'Bank' is defined, by law, as a warehouse for storing money.
    3) While 'money' is in the 'bank' the owner still holds legal title, subject to any agreed upon charge for storage and insurance/security.
    4) 'Loans' require the signature of the money owner and must specify amounts, payment schedules, interest, storage costs, and finder fees for the bank, if the bank 'found' the borrower.
    5) Unless agreed to otherwise, the interest belongs to the owner.
    6) The 'bank' serves as a witness that the 'money' changed hands and serves as an escrow account if the 'money' is issued in the form of a warehouse receipt (ie. a banknote).
    7) The bank's signature is required for warehouse receipt type loans and they are legally culpable for allowing two receipts to be issued on the same 'money'.
    8) When a warehouse receipt type loan is satisfied, the bank must sign to verify that the loan is satisfied thereby allowing another loan of the same money to be made.


    Since ownership of 'money' does not transfer to the bank, they can't increase it via FRB. The money can only be loaned out once if physically transferred, and if a banknote (warehouse receipt) is issued the bank is responsible for holding the actual money in storage and ensuring it is not loaned out a second time.

    In essence the banks acts as a facilitator and it earns profit from fees or agreements for splitting 'interest'. Therefore, any banknotes in circulation would have to be backed by physical money of some form, most likely gold or silver but not necessarily.

    "Good" banks would, over time, develop the reputation for honesty and integrity in dealing with both borrowers and lenders. Beyond that point cost of 'services' would become the competitive issue between banks. Banks which try to skirt the rules would go under the first time they were caught as none would trust them.

    The only public notices required would be bank fees, and bid/ask exchange rates for banknote <-> 'money' of various types.
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  •  
    Dec 03 04:43 PM
    Smarty, wow back at you! I see merit in both plans. May they both be tried whether the government approves or not. Any successful system will be opposed by the gub'mint, you can be sure even if Heaven itself smiled at it. However, the free market is great beyond the control of any government for transcendental reasons that many would not believe. The government may destroy prosperity but its power to create prosperity is an illusion.
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  •  
    Dec 03 05:06 PM
    Smarty,
    Our plans are complimentary. You reject the current money model while I attempt to make it work. Yours is fully consistent as I would expect from you. I would love to prove that a rapidly growing and stable economy is neither dependent on fraud (FRB) or the availability of a particular commodity. How could such a wonderful thing as money have dishonest roots or arbitrary requirements?
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  •  
    Dec 03 07:20 PM
    It occurs to me that a bank as I have described might hide in open view as a company specializing in commodity speculation via the futures market. Common stock in that company would be the money. The money would thus be expected to appreciate in value and grow in quantity. And no capital gains since the (money) stock would never be sold!
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  •  
    Dec 03 07:57 PM
    Thus FRB is done in by the stock market which finally rejects the beast. Truly, justice will not be denied forever and is often ironic and poetic to boot. The banking system done in by the very institution it thought it had bought with counterfeit money! Too much!
    Reply | Link to Comment
  •  
    Dec 04 10:14 AM
    "Yours is fully consistent " - moonbat

    And only 8 'rules' to boot, two of which are definitions.

    K.I.S.S.

    The more complex rules would include provisions for the Smarty_Pants everlasting bond issuance as well.
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  •  
    Dec 04 11:53 AM
    JMK called gold a "barbarous relic". Though I have resented the expression I now understand it. But notice that central bankers own the most gold which leads to this conclusion:

    At best, central bankers are barbarians; at worst they are thieves via FRB. Is this not an investment opportunity?
    Reply | Link to Comment
  •  
    Dec 04 12:18 PM
    "JMK called gold a "barbarous relic". " - moonbat

    The main reason he called it that was that the use of a fixed gold standard restrained governments from massive creation of money in order to 'fix' society's ills. You couldn't apply the 'enlightened' knowledge of monetary policy if you first had to tax the money away from the serfs. They got a bit grouchy when the taxes got too high.

    So, gold was 'barbarous'. It limited your flexibility to apply ideas which were 'obviously' a better way to run things, in his view.

    And as a result, you can see just how much better off we are today. JMK's 'enlightened' ideas have turned the world's largest creditor into the world's largest debtor in less than 30 years.

    Yay! (NOT)
    Reply | Link to Comment
  •  
    Dec 04 12:46 PM
    Moonbat's current understanding of the business cycle

    Assume the fractional reserve banking system does not create enough new loans to balance repayment of old ones. The money supply (M) will then drop. According to MV = PY, assuming unchanged V, then PY must drop one to one. Y, aggregate output, is unlikely to change immediately so then P, the price level, must drop one to one also. Normally, P drops due to increases in Y resulting from productivity gains which is a blessing. But now in a reversal, the drop in P causes a drop in Y (lower demand for output). So now, both P and Y have dropped. Thus according to MV = PY, V the velocity of money must also drop. So, a simple reduction in new loans has increased prices, decreased output, and lowered the velocity of money. Thus, just to avoid recessions, fractional reserve banking requires ever increasing credit expansion.

    <i>mv = py
    If you want to know
    it will tell you why.</i>
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  •  
    Dec 04 12:52 PM
    " So, a simple reduction in new loans has increased prices, decreased output, and lowered the velocity of money." moonbat

    CORRECTION!! Make that lowered prices!!! Inflation on the brain, you dumb moonbat.
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  •  
    Dec 04 01:12 PM
    How a commodities or single asset based money and non-FR might be created and operated.

    1. Incorporate and sell common stock to bank members, retain 51% (so the evil banking cartel can't take control). This proceeds are your bank capital. Use to set up office, hire Smarty, etc.
    2. Sell as much preferred stock as possible but not to exceed bank capital? This is your initial money issue. Explain to buyers that they may deposit these shares to be loaned out for interest both for the bank and themselves. Explain how their preferred stocking holdings shall be protected from dilution when new preferred shares are sold and thus the value of their holdings should permanently increase but only while there shares are on account. Also explain how the backing by commodity futures should grow over time. Explain to common stock holders that they should own preferred stock too since this should appreciate the most rapidly.
    3. Start buying and selling commodity futures seeking appreciation in value or minimum depreciation in value with proceeds from preferred stock sale. Use relatively safe strategies Avoid reportable capital gains if possible and legal. This is the backing of your money.
    4. Start lending out preferred shares at competitive interest rates with acceptable collateral according to "A proposal for an optimal money and banking system".
    5. New money creation must be handled in an ethical manner. The buyer shall buy a futures contract in the same commodity as the existing backing and with the same expiration date and make a short term non-interest loan of it to the bank. The bank shall issue new money (preferred shares) in accord with the amount of the futures contract and current backing levels. The bank shall then determine how much money of the new money will be used to buy the futures contract so as to allow a pro rata distribution of the remaining new money so as to prevent dilution among existing money (preferred stock) holders. Those amounts will then be given to the new money purchaser in exchange for the futures contract and distributed to the existing money holder accounts respectively.
    6. Redemption of money shall occur by selling an existing futures contract for US dollars and paying out the appropriate amount based on number of shares redeemed and current per share backing level in US dollars as determined by the amount received from sale of the futures contract. The remainder shall be used to purchase another contract with the same delivery date. The shares shall be destroyed and existing money holders informed of the expected drop in the price level in this money.
    7. Refer to "A proposal for an optimal money and banking system" for more info.
    8. It occurs to me that a single asset might be used to back the money. However, redemption of money would require sale of that asset for US dollars and repurchase of another asset. A solution would be loans from bank capital between asset sales.
    10. Moonbat's understanding of the stock market and futures market is limited and what he has said above is likely to have flaws. Corrections and suggestions are therefore welcome.
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  •  
    Dec 04 01:47 PM
    "the drop in P causes a drop in Y (lower demand for output)" - moonbat

    ?

    1) M drops,
    2) less M implies each M-let has more value and will buy more Y-lets
    3) Y being unchanged (due to inertia) with less M yields lower P
    4) Lower P-lets means people will buy more Y-lets, hence increased demand and increased Y-let production

    In the end the changes in P (down) and Y (up and ) will balance out the change in M (with perhaps a slight change in V).

    The assumption is that Y and V are difficult to change quickly for small changes in M. The bulk of the 'correction' will be in P.

    P can change in very short order.

    Y, obviously, takes longer to change due to production issues.

    V changes are more of a social inertia issue and will only change drastically for a severe economic dislocation. Your spending habits don't change much if you hear that the money supply changed by 0.5%, but they might change a lot more if you heard the money supply had tripled.
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  •  
    Dec 04 04:37 PM
    Thanks for the feedback. I had to make sure the units balanced as a sanity check. Here is what I surmise they are from the reference I used:

    M - dollars
    V - transactions/year
    P - dollars/unit
    Y - unit-transactions/year

    So, dollar-transactions/ye... = dollars/unit * unit-transactions/year...

    My understanding was nearly correct except for the "per year" aspect. Moving on ...

    "4) Lower P-lets means people will buy more Y-lets, hence increased demand and increased Y-let production " Smarty

    I agree that people would wish to buy more Y-lets because of the price drops but where will the money come from since we both agree that it was a drop in M that caused the price drops? So then, according to MV = PY, either Y or V must drop, followed by the other till equilibrium at lower values of total output,price level, and transactions per year. Rothbard says that the economy will adjust to a drop in the money supply but apparently at a lower output level.
    In theory, any amount of money in an economy is adequate but changes in it can be a killer, it seems. Price deflation caused by increased output because of productivity increases is all to the good. But price deflation caused by decreases in the money supply is a mockery since people can't take advantage of them.
    FRB truly does seem to require endless credit expansion to prevent actual output reduction.

    But yea, I assumed Y would drop followed by V but it doesn't matter since they must both decline if the equation is to end up balanced.

    Iron sharpens iron. But it also sharpens moonbats, I hope. Thanks for the feedback.
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  •  
    Dec 05 10:07 AM
    "But price deflation caused by decreases in the money supply is a mockery since people can't take advantage of them."

    Not entirely true. If you are earning a stable wage and prices fall because of a lowering of M, your salary won't decrease (hopefully), but you will be able to buy more Y with it, or save more.

    The trouble with less M is that some borrowers won't be able to pay off their debt and go under, especially if it's a business and worker-bees wind up without a job as the economy adjusts to new money levels.

    The 'bad' aspect of lowering M is repaying debt. Each M-let is worth more so the true 'cost' of servicing your debt increases.

    If you can keep your job at the same pay and aren't over your head in debt then you will be better off as your income and savings are gaining in purchasing power when M decreases.

    Your general statement regarding lower prices via increased productivity is correct however. That's the preferred path for falling prices. The 'best' arrangement is a stable money supply with increasing productivity. Savings will go where demand is highest and standards of living will increase over time.

    That's my take on it, though I've been wrong about things a time or two in the past.
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  •  
    Dec 05 12:50 PM
    Smarty,

    I can see why you would pick a fixed money supply because even increases in precious metal supplies when bought with new money could potentially be enough to cause price inflation. But what could back a money that can't be discovered in a huge new PM mine or be the result of a spectacular growing season or be subject to oil fields being blown up? What is it that in a stable 100% reserve economy would grow steadily based on sound loans? Two things at least, business equity and business real estate. With a sound 100% reserve banking system both should grow steadily without a boom/bust cycle to worry about. And this is truly beautiful or I miss my guess. The asset backing will appreciate in value from investments made with real savings based on saver time preference. This in turn will allow the issue of new money to keep pace. Sounds like a potentially runaway loop, doesn't it? But it isn't I bet because of the need for real savings. Why issue new money? Because without it the money will appreciate to the point where new entrants are denied. Smarty, I think this could cream the FRB system or I have never been an engineer.
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  •  
    Dec 05 02:35 PM
    I think it would be nearly impossible to maintain a completely fixed money supply. Even gold would slowly increase over time from mining operations and dilute the value of existing money. In a non-FRB gold backed system even the amount of gold mined will be a function of the free market.

    Think of gold as only another good or product, then it has an inherent 'price' in every other good for every person based on their relative valuation of the other good. 1 oz of gold might be worth 1 hour of lawyer A's time or 20 chickens or 100 eggs.

    There isn't even a 'fixed' value to gold. Everything is relative to each actor's preferences and values. If you have thousands of ounces you might be more willing to pay an extra ounce for something than you would if you only had 10 ounces to start.

    The fact that there is still gold to be mined means that there will be a natural tendency for the stock of gold to increase as its value increases.

    As productivity and effeciency increase, the prices of 'stuff' will decline in terms of gold (or, the value of gold in 'stuff' will rise). At some point, the value of gold will be high enough that someone will go to the effort and expense of mining more gold because the value received for it in 'stuff' will outweigh the expenses of mining it. The miner will profit for having increased the money supply and in the effort reigning in the value of money.

    The profit driven mining operation will help to moderate the increase in the value of gold by increasing its supply in response to its increasing value. When the price of gold falls far enough from increased mining output, mining will slow or stop in response because it will cost to much relative to what the gold will buy.

    As long as there is more gold in the ground, there will be limits to the amount gold's value can increase from productivity improvements because someone will realize that he can profit by digging up more gold.

    I think that sort of addresses your concerns about money being 'too expensive'. Unless and until there is no more gold to dig up then the market will help moderate its value. Even after that point, a substitute money might emerge to supplement gold as money. Maybe platinum, palladium, silver, or rhodium. They are all rare and could be used as an extension to the money supply.

    Personally I don't think money can ever become "too valuable". I'm not sure what you mean by 'new entrants are denied', but anyone can earn money by laboring. We all start that way. After that point you just have to live within your means and save until you can afford to compete with the heavyweights.

    The only issue I can think of is trying to provide smaller and smaller units of account as the value of money increases. Gold can easily be split into very small sizes and so this wouldn't be a big problem for quite some time. Currently gold is measured in pennyweights (1/20 oz) and grams (~1/31 oz). These are worth between $20 and $35 at current gold prices. They could be further subdivided, or as in the past, silver can be used for smaller increments.
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  •  
    Dec 05 03:09 PM
    Smarty,
    I apologize for not providing this flow diagram:

    true savings + time preference -> business loan -> increased productivity -> increased output -> lower price -> additional true savings.

    So, business productivity, verified by additional savings, has occurred. So the stock price should rise. At that point, the asset base of the money has risen; the same amount of money is backed by a more valuable asset base. Eventually, it would be a Berkshire Hathaway of moneys. Notice that the FRB banks back their FR loans with IOU's since they create money in anticipation of economic growth. The money itself is fiat. But with this system the money itself is backed with real equity built with real savings in a glorious and stable feedback loop of prosperity.
    These are hard times and the banking system caused them. A solution will be found I'm sure, if this ain't it.
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  •  
    Dec 05 03:42 PM
    "glorious and stable feedback loop of prosperity." - moonbat


    Don't mean to rain on your parade, but these are the scariest words you have written on the topic to date. :-)

    I have learned to be skeptical of any plan which makes claims using words like 'glorious'. At best a system should be robust enough to survive the eventual stupidity of the participants while providing no means for individual actors to rig the game in their favor short of providing superior products and services.

    I am not sure any system creating money via any means other than selfish profit would be sufficiently robust. Somebody would figure out how to tinker with numbers for their own benefit.

    At least the gold backed system requires someone to spend their own resources and dig in the dirt before they get paid.
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  •  
    Dec 05 04:06 PM
    "I am not sure any system creating money via any means other than selfish profit would be sufficiently robust." Smarty

    Well, the bank and savers make money off interest on real savings produced by real productivity gains. Yea, the crooks will find a way somewhere. But now honest folk may not have to be yoked to a crooked system everywhere. Imagine if your best friend was married to someone who made their life miserable. That's how I feel about the free market and FRB.
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