Mugabe in the Lurch

"The end of hyperinflation is always and everywhere a fiscal phenomenon."

This statement is true - or so I learned in econ class. So the government can end a hyperinflation, but what begins one?

I remembered this lesson when I read about the recent election woes in Zimbabwe, a nation previously infamous for its record-breaking inflations.

Many hyperinflations start when hard currency grows faster than real output - which means that a dollar today is much, much more than a dollar tomorrow. Needless to say, people start to expect that their money will be worthless in the future, which means it is (by a vicious feedback cycle) worth less today.

The fact that there is excess liquidity in the economy (think the opposite of the liquidity crunch recently experienced in the United States) means that money markets fall out of equilibrium, and an unstable market is nobody's friend.

But MORE simply put, hyperinflations start when a military leader (Mugabe?) prints cash to pay soldiers. He prints too much cash, prices start to go up, suddenly everything's awhirl. And yes, chaos breaks out of confinement that easily.

Now, of course, Mugabe's up a real creek. He's wrecked the economy (and let's not mince words: the recent troubles have as much to do with him as anyone) and his friends want to call in their debts. He's unpopular at home and abroad.

But short of matriculating at the George W. Bush Center for Men Who Can't Lead Good, what options does he have? And what option does Zimbabwe have? Regardless of whom they elect, they face a terrible and uphill battle. The climb down from an inflationary spiral is often more torturous than the ascent, and involves recessions so deep they feel endless. (See Argentina in 2001. Ending hyperinflation there resulted in a poverty rate over 50%.)

The problem with political upheaval is always one and the same. A constantly changing and ineffective civil service in turn leads to poor administration and enforcement. Production declines when regular citizens live in fear and the absence of opportunity, and eventually, the government in power attempts to pay its cronies through seignorage. Hence: hyperinflation.

This timeline does not absolutely apply: there must be exceptions. But the link can't be denied. A government facing a fiscal deficit can only finance itself through one of two options: seignorage or borrowing.

Governments that cannot borrow (poor credit, instability) resort to seignorage. Governments with an excellent credit rating (the United States) choose to borrow.

In fact we might have more in common with Zimbabwe than we realize. The United States, too, fights an uphill battle in Iraq, and our government faces mounting unpopularity at home and abroad. And we've mortgaged ourselves to the hilt. Meanwhile, Mugabe has leveraged himself past the point of no return in order to pay for his war.

I wonder how it'll all end up?