America’s Zimbabwe Moment

The news and commentators are less grim about the world economy than they were a year ago. Some reports are even optimistic that we’ve passed through the worst of it. Housing prices appear to have stabilized. The unemployment rate may have bottomed. Financial Institutions are returning to profitability. Now, as the Federal Reserve used “every trick in the book” to stabilize the financial system, by creating new money, buying mortgages and debt. But now that the crisis is over, can it afford to stop?

That’s a question asked by Joshua Zumbrun in Forbes, with an article ominously titled, Fed Faces Its Zimbabwe Moment:

Creating new money to buy government debt is the sort of strategy that’s known to destroy economies–just ask Zimbabwe, which suffered so much hyperinflation that it destroyed its currency. The Zimbabwe central bank printed bills in the denomination of 100 trillion Zimbabwean dollars, then found they had value only as a novelty item on eBay. Eventually, Zimbabwe was forced to abandon its currency altogether.

But the difference between the U.S. Federal Reserve and the Reserve Bank of Zimbabwe (one would hope) is that the Federal Reserve will stop before it wrecks the dollar.

The first major test of the differences between Zimbabwe and the U.S. is rapidly approaching. An indication could come as soon as the Fed releases a policy statement Wednesday afternoon. The Fed is not expected to announce a major change of course, but the present course calls for current programs to unwind.

Zumbrun thinks that the deadline for making a decision as to what to do next is fast approaching, and its effect will likely be inflation. Yet there are no signs of such inflation. In some ways, America’s present financial state has baffled theoretical economists — why is the dollar having a rally and why are there not more signs of inflation? The Fed actually predicts that there will be less inflation this year than last. But how the Fed removes itself from supporting the foundations of the financial system has yet to be seen — to say nothing of how the TARP and stimulus money will have to be repaid.

About Curzon

Lord George Nathaniel Curzon (1859 - 1925) entered the British House of Commons as a Conservative MP in 1886, where he served as undersecretary of India and Foreign Affairs. He was appointed Viceroy of India at the turn of the 20th century where he delineated the North West Frontier Province, ordered a military expedition to Tibet, and unsuccessfully tried to partition the province of Bengal during his six-year tenure. Curzon served as Leader of the House of Lords in Prime Minister Lloyd George's War Cabinet and became Foreign Secretary in January 1919, where his most famous act was the drawing of the Curzon Line between a new Polish state and Russia. His publications include Russia in Central Asia (1889) and Persia and the Persian Question (1892). In real life, "Curzon" is a US citizen from the East Coast who has been a financial analyst, freelance translator, and university professor; he is currently on assignment in Tokyo.
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6 Responses to America’s Zimbabwe Moment

  1. tdaxp says:

    But hey, it’s not like Bernanke was one of the policy makers in charge when we got into this crisis in the first place…

  2. PaxAmericana says:

    If things go the way of the name of your site, the US will default, and this will resemble the British default of 1931, which is what really made the Great Depression great. The pound served as the basis for most foreign trade back then, and the loss of the dollar standard today would be very painful.

    Also, a big question is whether the crisis wasn’t simply delayed.

  3. Master Cook says:

    Its a big mystery as to why the US economy hasn’t been wrecked in the way the same exact policies have wrecked the economies of other countries. There is probably something going on behind the scenes to “fix” this.

    Another big mystery is how people in Zimbabwe live with what seems to be no functioning economy. I’m not hearing any reports of people starving there. Is there a famine in Zimbabwe that is just not being reported? Or does everyone grow their own food and resorts to barter? How can you still have cities and how can the government employee people without a currency?

  4. Kevin Kelley says:

    It seems that Joshua Zumbrun’s negative view of the Fed has been picked up by the conservative hounds of late night news, and they are currently using the fear of hyper inflation to illustrate the failure of the Obama administration, and considering the indications that inflation is not on the cusp of crippling proportions, Americans need to leave the pundits behind, ignore all the falsehoods being presented to them, no matter how real it sounds (reminiscent of the science explained in Star Trek episodes), and do the research themselves…

  5. Steve Benard says:

    No inflation — IF we buy the government’s figures. But I suggest we look at a broad range of commodities. They tend to lead the CPI by 6-9 months. By that measure, inflation is rising rapidly. Check out the charts for sugar alone! Ouch! Eventually, companies must either raise prices — or go bankrupt! Our “Zimbabwe moment” may be closer than we’d like to think!

  6. ElamBend says:

    I disagree. There may come a point when the feds money printing actions come due, but not for a while. The huge contraction in lending, both consumer and business has created a deflationary wave that swamps anything the Fed is doing right now (plus, banks are hoarding what money they do get). As consumers are pulling back in spending (either through new-found thrift or simply losing their jobs) retail prices are being slashed.
    In my industry Real Estate, commercial rents, industrial rents and even residential rents are going down. There is another big wave of defaults, this time in commercial real estate coming (the real crest begins next year). All of this is deflationary.
    This credit deflation is also affecting other places, for instance wholesale prices in Japan are dropping drastically.

    The inflationary piper may have to be paid some day, but not for a while.

    the dollar may be in for a big rally: