Washington, DC -- (ReleaseWire) -- 07/02/2015 --DAWN BENNETT: Philip Haslam is here. Haslam is an economic adviser, writer and speaker. He's the author of a new book with the long but important title of When Money Destroys Nations; How Hyperinflation Ruined Zimbabwe, How Ordinary People Survived, and Warnings for Nations that Print Money. Haslam's personal goal is to influence multi-national monetary policy with sound economic reform and I think this book does it. He resides in Johannesburg, South Africa, where as a South African, he has had a front row seat for Zimbabwe's hyperinflation, and that's where I want to start today. Philip, welcome to Financial Myth Busting.
PHILIP HASLAM: Greetings, Dawn, and greetings to your listeners.
BENNETT: So, can you paint a picture? You have had a front row seat for Zimbabwe's hyperinflation. How did the country change as the crisis unfolded, and how is the middle class impacted by all of this?
HASLAM: Great question. The hyperinflation didn't happen overnight; it was something that took time. And it started in 1997, when there was a run on the currency as credit markets contracted and there was a banking crisis in Zimbabwe. And the government responded to their debt problems with printing money. And that began to work its way into the system, and by 2008 the currency was in fully-fledged hyperinflation, and it collapsed a final death. That's kind of high level information, but what happened to ordinary people and middle class people on the ground was that stores emptied. It put pressure on producers and retailers, so that it was very difficult for the former suppliers to continue supplying goods and services, and so stores emptied, water ran dry, electricity was cut, and fuel supplies ran out, which obviously put a lot of pressure on individuals living on the ground in the country.
HASLAM: Today's conventional wisdom, especially here in the United States, is that printing money can be done without destroying the currency. Was Zimbabwe's so called monetary stimulus ever a subtle intervention, or did the inflation hit immediately.
BENNETT: No, it was very subtle. And this is quite a deceptive thing. People say now, 'Well, money printing actually doesn't make a major difference, in terms of inflation effects,' but because it takes time, it's very difficult to actually trace. And there's a specific statistic that very few people know. Professor Steve Hanke did research and it's shown that there have been 52 hyperinflations in the last 100 years. So that's one every two years on average, or more, and so it's a regular event. And a fairly standard process that happens when a country goes into hyperinflation is that a government is consumed in debt, and a time comes when the government effectively reaches its credit limit, as it were, and creditors begin to question whether the government has the ability to repay those debts, and they withdraw their lending facilities. And then that country will typically then turn to money printing, and go down a spiral in hyperinflation. So it's certainly something that's very subtle. Money printing never takes place on its own, or very rarely it does. It's driven by debt and excessive government consumption. And so we see that in countries around the world, where they're loaded in levels of debt where there's no realistic way for the government to repay their debts, and so they're turning to money printing as an option.
BENNETT: You detail in your book about how some in Zimbabwe were able to survive the hyperinflation. Can you share with our listeners some of the takeaways, and how workers can actually survive when they're paid in worthless currency?
HASLAM: That's obviously the real nub of the question. I get that often. People say, 'Okay, look, we can see there's a whole lot of money printing happening, and the government openly stated that they're going to respond to any debt crises with money printing. If that's the case, and hyperinflation is a risk, what does that mean for me? Tell me the top five where I need to invest in?' And the reality is it's a very difficult question to answer, and the reason it's difficult is because in a significant inflation environment, in hyperinflation, passive investments don't work. In Zimbabwe, an entire generation of pensioners lost all of their pension.
BENNETT: Explain passive investments to our listeners.
HASLAM: Passive investment is where you say, 'I'm going to take my money and I'm going to invest it somewhere, and I'm going to go about my daily life, and allow someone else to manage that money. And I'm going to come back and that money will have grown.' From whatever investment it is. It could be in stocks, it could be in bonds, in a property, in a business that has regular, fixed cash flow, you know, those sorts of things. And in a significant currency crisis, where there's a devaluation of the currency, it's very difficult to invest your money in something that's will first, keep its capital, and second, give you a return on that capital. So what we do is we say, look, our goal and our recommendation is to get people to educate themselves, because when you begin to understand the social stresses of what money printing does to an economy and to people—to people's lives, ordinary lives—then the solutions almost become self-evident. And that's really been our heart and our goal with our book When Money Destroys Nations, is to explain, in ordinary concepts that everyday people can understand, what money printing did to people living on the ground in Zimbabwe. But to answer your question, if I had to give some takeaway points, hyperinflation is a very painful experience for people living in an economy, and so those people that left Zimbabwe during the time of the hyperinflation actually immediately relieved those stresses. And so one third of Zimbabwe actually ended up leaving the country, so they were absorbed into South Africa and a number of other countries. And there was a significant social stress, but it was a significant and a wise move by most of the Zimbabweans who left. Another thing would be to ensure that one gets hard currencies and things like gold and silver, and Bitcoin is a potential alternative, and land that is arable, that allows people to grow their own food and get their own supplies of water and those sorts of things. Those type of things are very useful in a currency crash and hyperinflation, and we go into further detail in our book.
BENNETT: I want to talk a little bit more about currency. It seems like the idea of a gold standard has all but vanished from the face of the earth. Is there any way to run a fiat currency like the dollar, without some kind of commodity backing it? Are there any other examples of countries doing it right now?
HASLAM: There are few countries doing it right now. We live in a global environment, which is backed by two major currencies, being the US dollar and the euro, as global reserve currencies. And the entire global banking system and currency environment are based on fiat currency. Now, the problem with fiat currency is there's an inherent incentive for governments to be able to print that money. Because if I'm a government, I can print money without direct consequences coming against me. I can consume real goods and services using newly printed money, without having the population actually get uncomfortable about it. This is certainly what's happening around the world. So fiat currencies are inherently weak from that perspective. We advocate less for a government centralized currency that is backed by something firm and more for a privatized type of currency environment. You know, if you allow the market to establish the currency that it would like to use, then it will manage those processes itself. And a very good example is Zimbabwe. As the currency began to die, the government began to have to increase control over the population to use that currency and to keep prices low. Because obviously, they're printing money; they want to keep people using that money. And so it was illegal to use any foreign currency like the US dollar or British pound, but the economy then morphed into a barter economy, so people would literally meet behind the golf club, as an example, and trade wood for grain or fuel for milk. And of those, fuel became the most useful commodity that everyone needed, and very quickly people began to price things in liters of fuel, so they'd literally bring jerry cans of fuel to these barter meetings. And so for several years, things were priced in liters of fuel, and in the last year of Zimbabwe's hyperinflation, one of the fuel companies came up with an ingenious idea; they said, 'Look, if you pay us up front, we'll go across the border and go collect fuel, and issue you with a fuel I.O.U.' So it was like a piece of paper that said, 'You can claim so many liters of fuel.' And very quickly, those fuel I.O.U.s, those fuel coupons, became currency, and people literally used to go and pay with those fuel coupons, with wads of fuel coupons for their legal fees and transactions, and it became the de facto currency. And that's an example of how the markets find an alternative currency without needing government intervention. Obviously the government did whatever they could to try and stop alternative currencies coming in, because they were in a position where they'd benefit from their ability to print money. But we certainly advocate for a privatized market-based currency system.
BENNETT: Knowing what you do about America's own experiment with quantitative easing, our money printing program, what is your parting advice for our listeners? Should we be preparing for hyperinflation? And if so, what type of smart things should we do to prepare for it?
HASLAM: Yeah, it's-- that comes back to the real question. The Reserve Bank Governor of Zimbabwe, who was effectively the architect of hyperinflation, who printed significant amounts of money, he wrote a book after the hyperinflation, and he basically said, 'Look, we're justified in our money printing schemes, because all the other countries around the world are doing exactly what we did.' And he quotes specifically the United States, and he says, 'Look, we were a forerunner to what the United States are doing now.' So I think every single one of your listeners are people who use U.S. dollars or an alternative currency. They use the money the government gives, and yet typically people are very financially and monetarily illiterate. And what we recommend is that people study, 'Wow, what happens, and how would I be affected?' and you go away and do the appropriate research, and then look at doing what you can to hedge the risk, and also then take advantage of the many opportunities that actually present themselves in a significant depreciation of the currency. Because they were many. I interviewed one particular lady on the ground whose father could see that there was a whole lot of money printing happening in 1997, and he actually went to South America and did a whole lot of research on the hyperinflations that happened there, and came back with some unique business strategy, particularly around capitalizing on the movement and difference in the value of the currency. And he actually did very well, profited very well. And I guess, you know, I could go into detail, my point being, though, is that you can't get these ideas in a nutshell; you actually need to study what happens to an entire economy, every part of the social fabric? How does it affect housewives and farmers and teachers and business owners and so on.
All data sourced through Bloomberg
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or email@example.com