Inflation woes

The Central Bank of Zimbabwe is set to lop some more zeroes off the Zimbabwe dollar. They knocked off three back in 2006, and this round is set to see another 3-6 zeroes get the chop. Excuse this humble commentator for his cynicism, but when the annual rate of inflation is above 2.2 million per cent, this isn't going to help much. It will likely improve transaction efficiency for a short period of time, but unless Zimbabwe takes some concrete steps to rein in inflation, sooner than later the currency will be just as worthless as it is today.

Venezuela tried this trick last year, when it introduced the Strong Bolivar, which President Hugo Chavez promised would help curb inflation. A 'Strong' Bolivar is essentially just a normal Bolivar, Venezuela's unit of currency, with three zeroes lopped off. Unfortunately, Venezuelan inflation has actually gotten worse since then, reaching 32% in Caracas in the month of June.

I wrote last month about how inflation is fast becoming a major financial worry. This is especially true in developing countries and emerging markets . As painful as the medicine may be, now is the time when such countries should be prioritizing inflation control over economic growth. The short term losses are undesirable, but the long term dangers are too real to ignore. Keynes said it best:

As inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundations of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

It's troubling when there exists such chronic financial mismanagement in economies like Venezuela and Zimbabwe, which could both be in much better shape than they are. But they're not, and unfortunately it is the citizens of those countries who pay the highest price for that.