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by Brian Butler

The “savings glut” that may be to blame…

2009/02/10 in credit crisis, macro trends

The “savings glut” theory is one of the two main competing theories to explain some of the bigger mysteries of global finance in recent years (including the credit crisis of 2007 ).  The basis of this theory is that there are underlying fundamental “global imbalances” which are causing all of the trouble (and which need to be fixed in order for the crises to stop).  In this blog post, Im going to quickly outline “savings glut” theory…

The other theory (money glut)

The more popular (and easier to understand) theory (which Im not going to cover in this blog) is called the “money glut” theory…which basically says that American Central Bank kept interest rates too low for too long, which led to too much money, too much credit and encouraged too much risk taking by banks and greedy people on wall street.  This is the popular version of the story that most people hear every night from their local news commentator.  This is NOT the theory that Im going to review in this blog posting.

Savings glut (summarized)

The less well known (and more difficult to understand) theory of what-went-wrong…is the  “savings glut theory”….which basically says that the root of the problem lies not within the US, but with the fundamental imbalance of international finance.

While finance is risky (borrow short, lend long), it is even more risky when it crosses borders.  Countries in Asia and Latin America learned the lesson not to accept deficits after punishing recessions in the 1990′s and early 2000′s.  Since then, nearly all emerging nations (and most developed ones, minus USA) have fought hard to keep current account surpluses.   In an effort to keep away from risky deficits, many central banks (especially in emerging Asia) have purposefully chosen to (a) keep their currencies undervalued, and (b) to accumulate foreign exchange reserves to buffer against potential shocks.  Note that the countries with large reserves in 2009 are the ones most likely to survive this latest crisis with their economies in tact.   After seeing the prescriptions given by the IMF after the last round of crises, most emerging countries said “no thanks” to foreign capital, and instead have chosen to run massive surpluses.

The key to understanding the “savings glut” theory is to first understand that the nations “balance of payments“, by definition, must BALANCE.  That means that if a country chooses not to accept foreign capital, and therefore if they choose to run a capital account deficit…then they must by definition also run a current account surplus (the current account is physical goods exports).  That means that in order to export capital, they must also export products (I know, it gets a bit confusing, sorry).  The net result = they must keep the currency undervalued for this to work.  And the currency of choice = the US dollar (as a target peg).

“Ok, so what is the problem?” you might ask…

Well, due to the rules of global accounting…if one country runs a current account surplus, then others must run a current account deficit.  That part is easy to understand….if one country exports, another must import.  Ok, but what is less obvious is that if one country runs a capital account surplus (think China), then another MUST run a capital account surplus (think USA).  This is the root of the “savings glut” theory…

The savings glut theory states that sometime in the late 1990′s to early 2000′s…there was a massive amount of countries that all decided “thats enough”…no more foreign capital can come in.  It was too risky, and led to too many crises.  As Martin Wolf says, they chose to “smoke, but not inhale” from international finance…and so began a massive financial recycling program, whereby money that came in quickly was sent back to sender.  Money no longer flowed from rich countries to poor ones…instead money was borrowed on a massive scale from poor ones to rich ones.

Why did this happen?  The theory is that international finance proved to be too risky, and so developing countries almost unanimously chose to reject international finance and send it back.   (the only emerging markets that did not follow this prescription seems to have been the emerging Eastern European nations, many of which are now facing crisis…on a much deeper scale than emerging Asia).

Enter the “borrower of last resort”

But, with all of these emerging countries sending money back, unfortunately, there was only ONE country on the planet that was willing and able to accept it:  the USA.  (note that economists that subscribe to this theory are extremely critical of Germany / Japan and other developed nations that did not take some of this capital that was flooding the USA).

The US, as the theory goes, was uniquely capable to absorb this flood of “savings” because the US dollar was the global reserve currency, and the US could borrow in its own currency on a massive scale (with no chance of foreign exchange crisis).

economist-image

Who Believes this theory?

Surprisingly, the “savings glut” theory has some pretty impressive followers…

  • the list goes on and on….

Who is to right?  Who is to blame?

The reality is that both “savings glut” theorists and “money glut” practitioners are probably each 1/2 right. I read somewhere…”the Chinese may have supplied the noose, but it was the US that strangled themselves”…Thats probably the most accurate way of reconciling the “savings glut” vs “money glut” theories…

More on the “Savings Glut”

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by Brian Butler

Does borrowing money (to fund a recovery), make the recovery less likely?

2009/02/09 in credit crisis, macro trends

The trouble with borrowing money to pay for stimulus is that interest rates rise, which is exactly the opposite of what the government wanted in the first place (to get credit markets functioning again).  In this blog post, we will look a how there is a limit to the amount of stimulus that will be effective, because after some point…the additional cost of borrowing will push rates back up

Timeline:

  1. Rates elevated (in the credit markets)…see previous GloboTrends posts here, and here…
  2. Government tries to bring rates down by flooding market with money.
  3. But, government must pay for money…so it borrows
  4. Issuing of bonds at attractive prices pushes up borrowing cost
  5. Interest rates go back up.

Spending money to bring the rates down…

The US effort to fight the credit crisis (of ’07-’09) has been truly spectacular.   No expense was too great, no tool was off the table.  The treasury / central bank seemed willing to try anything to get credit moving again.  And, to some respects, their efforts have really started to work.  We see credit markets start to function again.  Interbank lending is flowing.  As the graph below shows, the US LIBOR rate has fallen back inline with pre-crisis levels.  (the spread over Treasuries may be high, but that’s due to “artificially” low Treasury rates, as investors flock to Treasuries for security, and not to increased borrowing costs for banks and AAA-quality companies).

ted-spread-libor-normal

“if you look at any debt instrument versus Treasuries, the spread will still be indicating financial stress. But that’s only because treasury securities are trading at unsustainable levels.  source: seeking alpha

ted-spread-libor-normal

The same trend can be seen for Commercial paper markets, Industrial corporate bonds rated AAA to A…but not for industrial corporate bonds rated BBB or lower.  To explain why BBB rated bonds are still increasing, you dont have to look at the weakness of the credit markets, but instead to investors decisions to shun risk and to favor high quality assets.  This is not an indicator of poorly functioning credit markets, but inversely a sign that investors preferences during a recession are reflected in the financial markets.

while investors are flocking back to high quality credits, they are still shunning lower quality bonds. That would be normal investor behavior in a recession.  source seeking alpha

So, government intervention in the credit markets seemed to be working..

But…then LIBOR rates started going back UP!

3m-us-libor

But, LIBOR is climbing at the same time that other indicators of credit availability are doing the opposite and falling.  The mystery to solve is “why would LIBOR rates be climbing while corporate bond rates fall?”

“…recent increase in Libor contrasts with recent improvements made elsewhere in the credit markets. U.S. corporate bond spreads, which reflect the interest rate investors are demanding to hold this debt, have fallen after hitting record highs in December.  Standard & Poor’s said Wednesday that spreads on investment-grade corporate bonds tightened to 458 basis points prior day, down from 523 at the start of the year. Junk-bond spreads fell to 1,424 basis points from 1,647 basis points”  source:  marketwatch.com

Borrowing costs get factored in…

To explain why interbank lending rates are tightening (LIBOR rates are going back up), while other measures of credit market liquidity are easing, you need to look at the flood of new sovereign borrowing coming onto the market (especially from the USA).

In order to fund this boost in liquidity, the US government has needed to tap the market for funds.  In essence, they needed to borrow money in order to fund the recovery.  This makes sense, but the problem is that the very act of borrowing funds started putting upward pressure on the very same interest rates that the government wanted to bring down.

Why? Well, because of how the bond markets work….in order to borrow money the US government offers bonds, and to get investors to buy those bonds, they offer a better price.   As investors can get a better bang-for-the-buck on US treasuries, it pulls up rates across the board.  More supply for equal demand makes the price go higher.  This movement is reflected by the higher interest rates.

The question is a matter of scale.  If the additional borrowing is minimal, then it wont overpower the stimulus, and rates will continue to fall.  But, if the borrowing increases too much, then the very act of borrowing can push rates back up (where the government intended them to fall).   But, how much extra borrowing are we seeing now (and is it enough to push up rates)?

In just this week alone, we are seeing  …”billions of dollars in new debt are due to be sold this this week.  The Treasury was set to auction off $31 billion of 13-week notes and $30 billion in 26-week notes Monday. On Tuesday, $23 billion of 52-week bills go on the chopping block, along with $32 billion of 3-year notes. On Wednesday, the government auctions $21 billion of the 10-year note and $14 billion worth of 30-year bonds will be sold Thursday.”  source:   CNN money

A limit to the stimulus…

Maybe there is a limit to the amount of impact that governments can have in loosening the credit markets.  It would be terribly ironic if the very act of fighting to push down the interest rates might be pushing them back up again.

Question is…how far will rates rise?   That all depends on how much the government borrows to pay for more stimulus.

Moral of the story:  there is a limit to the amount of stimulus that will be effective, because after some point…the additional cost of borrowing will push rates back up

visit GloboTrends Wiki for more..

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by Brian Butler

Beggar thy neighbor (part 2); this time its Switzerland?!?

2009/01/26 in credit crisis, currency, macro trends

Back in December, I wrote an article about the risks of rising protectionism in which I forecast the potential rise in beggar-thy-neighbor policies as a result of the ongoing economic crisis.  I called that article “part one” in anticipation that further articles may need to be written (hoping that they would not).  But unfortunately, there has been a string of recent news articles that have shocked me into writing a part 2 for this series  (lets hope there wont be a part 3!).   The culprit this time comes from the most unlikely of all places…Switzerland (yes, the home of the “WTO“, the global protector of free trade).

Why worry about Switzerland?  Well, because of a recent quote from Swiss National Bank Vice President Philipp Hildebrand….where he  pledged to sell “unlimited amounts of the currency (Swiss Franc) to curb its  appreciation.”  In other words, the Swiss National Bank would do everything in its power to devalue their currency (compared to market supply /demand).  This means selling their own currency to buy another currency (likely target = the Euro).

On the surface it appears harmless for Switzerland to assume this protectionist stance…what can it hurt if a tiny country decides to defend its currency?  ( With a GDP of around $490 billion, Switzerland is about the size of Belgium or Sweden, two middle-ranking economies in the 27- nation EU.)…And, doesn’t Switzerland need the help? (because their banking-dependent economy has been harmed by the global crisis, with the resulting unemployment and potential deflation which are threatening the Swiss economy)…

The reasons actually make some sense…

  1. Switzerland is facing the risk of deflation….which is terrible….and so, in order to avoid this terrible economic situation of deflation, Switzerland might need to have a weaker currency so that prices of imports will be higher, hopefully leading to some inflation (some rise in prices, which would counter this deflationary pressure)…
  2. Also, Switzerland needs jobs, and since the economy is heavily dependent on exports (to Europe mostly), the currency should be weaker to help drive up exports and keep the Swiss economy moving.  (Swiss exports, make up more than half of Swiss gross domestic product, and account for a  large percentage of Swiss jobs).

Ok, that sounds reasonable…but Switzerland is not just a “tiny European country”…they are a modern, advanced economy at the heart of the global financial system (and hence, smack in the middle of this global crisis).

The trouble with protectionism in Switzerland is that the same excuses (to turn protectionist) could equally apply to both Japan and to the US…who are both fighting slow economic growth, rising unemployment, falling exports and the threat of deflation (which Japan fought for over a decade).

Why focus on the relationship among Switzerland, Japan and the US?

Because all three of these currencies have appreciated during the global crisis.   These are the three major “safe havens” for global capital as it flees risk in other areas.  All three were major carry-trade partners (in the past) in which their local currency was borrowed at low interest rates, and invested abroad at higher interest rates.  But, as the world lost its appetite for risk, and as volatility increased, global investors were forced to unwind (reverse) those investments, and to bring massive amounts of capital home (to all three countries).  This explains why US, Japan and Swiss have seen their currencies appreciate during this crisis.

The trouble is that none of these countries manufacturing base benefits from having currency appreciate.  All three see their exports less competitive internationally as a result of strengthening currencies.  All three are facing job losses and deflation and near-zero percent interest rates.  All three are facing political pressures to create jobs and fight their local recessions.

And up until now, all three have respected the principles of free trade, and have allowed their currencies to float on international markets.  But, this changed when Switzerland broke-ranks with the others, and announced their intention to try and stop this appreciation to help their local economy.

This is extremely dangerous because it sets precedent for the other major trading partners.

What would happen if Japan were to announce their intention to also try to devalue their currency?  It clearly is in Japans interests to do so as it would help their important export sector…but, would that set off competitive devaluations across SE Asia?  Would China follow?  If both the Swiss and the Japanese (the only two other appreciating currencies along with the US dollar) were to actively devalue their currencies, would the US be far behind?  Can all currencies devalue?  Clearly not…but if all try to …its the basis of a competitive trade war.

Note:  the Japanese Yen has appreciated much more strongly during this global crisis than the Swiss Franc, but they have been surprisingly quiet and restrained in their non-defense of the currency.  In the chart below…you can see that the Swiss franc was steadily strengthening vs the Yen for about 4 years…but then the crisis hit, and the Yen has strengthened much more in comparison to the Swiss franc (inverted scale…so a downward sloping line = Yen strengthening, Swiss franc weakening).

chfjpy

In summary…it is important to remember that not ALL countries can follow this strategy of devaluing their currency, because one currency must appreciate if another depreciates…the trouble is that if all countries try to follow this strategy, we would have a trade war!

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A closer look at the Swiss Franc – a 5-year perspective…

What is Switzerland really worried about?

Has their currency really appreciated that much?   As we saw in the previous chart, the Swiss Franc has actually depreciated a lot compared to the Japanese Yen (or, not appreciated as much vs other currencies as has the Japanese yen).

How about comparing the Swiss Franc vs the Euro (which is the major trading partner of Switzerland)?  Well, in this case, you do see that the Swiss Franc has appreciated during this crisis.  Where it used to take 1.65 Francs to buy a Euro, but now might cost 1.50 (meaning that the Swiss Franc is stronger as it costs less to buy a Euro). But this movement is less dramatic if you take longer-term horizon and look back over the past 5 years….

eurchf

If you see the chart above…leading up till the beginning of 2008, the Euro was strengthening vs. the Swiss Franc…making Swiss exports more competitive in their critical export market.  But, as the crisis began, the Swiss Franc began strengthening vs the Euro, making Swiss exports slightly less competitive (the basis for protectionist policies as was recently announced by the Swiss central bank).

But, this move in currency appreciation has hardly been dramatic when viewed from a historical perspective.  Over the past 5 years, the Swiss Franc has typically traded between 1.5 and 1.6 to the Euro, with a brief period during the 2007 year in which Switzerland benefited from a slightly weaker currency.   Then, in the end of 2008, the Franc strengthened a little beyond that 1.50 barrier, but is that enough to warrant triggering a protective stance in one of the world major developed economies?  Is that movement significant enough to risk triggering a world wide competitive devaluation competition?

How about vs the dollar?

usdchf

Here again, the chart doesnt show much more than a return back to historical levels.  This really doesnt look like the kind of distortion that would normally lead to a quote like this:

  • quote from Swiss National Bank Vice President Philipp Hildebrand….where he  pledged to sell “unlimited amounts of the currency (Swiss Franc) to curb its  appreciation.”

Boy oh boy, I really hoped cooler heads would prevail in one of the worlds most developed economies!   (especially considering that the WTO, the very institution that is supposed to stop trade wars, is LOCATED in Switzerland!)

Join our Forum and add your comments:  here

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Could there be good-side to all of this?

Effects on Eastern Europe:

Interestingly, the Swiss depreciation might actually help countries such as Hungary, which are facing a very serious economic challenge in 2009.   Many Eastern European nations borrowed heavily in Swiss Francs in the past in order to fund development back home.  But, as the Swiss Franc appreciated, their debts suddenly grew, and default risks rose.  So, perhaps the “beggar thy neighbor” of Swiss….may end up actually saving their (eastern Europe) neighbors…if allows them to be able to pay back swiss frank loans…

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by Brian Butler

If China were to stumble…

2009/01/11 in macro trends, political economy

Most analysts predict that China will continue to grow at a rate (more than) 7% in 2009.  This follows decades of double digit growth, capping an amazing run in economic development.  But, while most analysts discuss 7% as the critical growth level to support the massive demand for jobs from an ever-increasing population, it is rarely discussed what would happen if China were to dip much lower than that, and if it actually faced a recession.

What would happen to the global economy if China were to stumble?  Imagine growth falling to just 3-4%, or even negative growth for a year or two…would social unrest hit critical levels?  Could China deflate its currency enough to drive enough exports to put them back on track?  Would that spark a global trade war?  What would happen to global commodity prices, and what would be the effect on Latin America/ Africa?

see our wiki discussion “changes are happening in China“

While I may agree with most analysts that forecast 7-10% GDP growth for 2009, I do have to wonder if its possible for China to ALWAYS have this kind of growth.  Economic history  seems to dictate that ALL economies eventually face recession (not just sub-seven percent growth, but true recessions).  China should be no different, in that they should also eventually face recession.

One of the least discussed topics (as far as I know) is “what would happen to the global economy if China were to face a real recession?”.   Would they continue buying up US treasuries (and continue financing the US recovery)?  If not, would the dollar tumble?  Would global supply chains be effected, and if so, how?

The possibility of a Chinese recession should be discussed, and should be planned for.  Because if you look seriously at China, you will see that the country’s economy is more fragile and delicately balanced that it may appear at first sight…its based on a series of controls…all of which have to be in place to make the system work.  Any of which, if they were to fail, could cause the system to break down…

Currency Controls

The growth model that China has pursued has been one of export-oriented growth, and managed currency exchange rates.  The currency is managed vs. the US dollar (as are many Asian and oil-exporting countries currencies).  This means that they actively buy up US treasuries (buying dollars and selling local currency) to drive down their local currency.  This means that the money they receive from exports is recycled back to the US, and not allowed to stay in China.   Investments in China are largely driven by FDI (foreign direct investments).

This relationship between the US and China is fundamental to explain the growth story behind China’s development over the past decades.  China is the bank, the USA is the borrower.  China is the producer, the USA is the consumer.  Think of the relationship like “vendor financing” from the producer to the consumer.  They finance, and we purchase.

But what would happen if China were forced to appreciate their currency?  Would internal local demand pick up enough to offset the decrease in foreign demand?   In 2007 we saw what looked like a substantial movement upward (appreciation) of the Chinese currency vs. the US dollar.  This was allowed by the Chinese in an effort to combat local inflation (and perhaps in response to political pressure).  But as the economy started to slow, and as massive amounts of people were laid off with factory closings, the Chinese quickly shifted course are depreciated in December of 2008.  Local pressure of social unrest is much more powerful than foreign pressure of trade retaliation.  Plus, it helped that local inflation pressure eased, thus removing local unrest over rising food prices.

Capital controls:

In order to both control the currency AND also have local monetary policy control, the Chinese must also have in place strict capital controls which limit the flow of money into and out of China.   The result (or intention) of this policy is that local Chinese are not able to invest their savings overseas.    For foreign investors, it was an attempt to limit the flow of “hot money” into China, which was necessary if you are going to try and keep the value of the currency down, and avoid a rash of inflation.

One fear is that if the capital controls were to break down, that could spell the end of the currency controls.  It would also spell the end to the savings controls which I will discuss next…

Savings Controls:

In recent years in China, all savings were basically funneled to the state, who in turn invests that money overseas for them (buying up US treasuries, etc).  The machine that drives the finance model in China rests on the fact that local Chinese had very few options with which to save for their future.  The only real investment for the future was to give your saving to a government- owned bank which paid tiny returns (like 1-2%).  While in recent years there has been some challenges made to this fundamental system (which are good for local Chinese), these changes are a risk to the Chinese model because if local citizens had more options, then the borrowing cost for the government would surely rise (making money more expensive for the Chinese government).   The system worked because local Chinese had no choice but to give their money to the government at very low interest rates.  In recent years we saw massive bubbles in alternative assets as locals sought other ways to save for the future at higher rates of returns.  The stock market (which saw a huge bubble), or in real estate (which also saw a huge bubble).

With the WTO came foreign banks, and with foreign banks comes savings options.  But savings options threaten the low cost borrowing scheme of the Chinese model.  If there were also to be foreign investment options for Chinese, it could see the end to capital controls / currency controls.  All of this must go together in order for it to work…

Mobility Controls:

The engine for economic growth in China has been located along the eastern shoreline.   Cities like Shanghai and factories along the coast, however, have been built with labor from the interior of China.  These migrant workers were the source of much of China’s cost advantage (along with the managed currency).  But, interestingly, these workers are not considered full time residents of these locations, and must be sent back to the country side if the economy were to slow down.  They are essentially citizens without rights in the places where they live.  Without the rights to find their own apartments, or to seek other jobs (with higher pay) , these workers are forced to accept the pay that comes from the company that sponsors them.   This kind of migration control is very critical to economic magic that has powered China’s growth.  But, what happens if China goes into recession and massive amounts of people are “ordered” to return back to the country side, and to leave the cities?  Will they all obey?  Will there be social unrest from urbanized residents that dont want to return?

Bank Fragility

In the US, we have been learning the hard way that banks are fragile by their very nature (borrowing short, and lending long is inherently risky).  This is true not only in the US, but the world over, and is especially true in emerging markets where there is less faith in regulatory institutions. Layered on top of this inherent banking fragility is the fact that China’s banks have been flush with cash for so long that they have surely built up portfolios of bad loans.  Political pressure has surely played a part, and has added to the fear that China’s regional banks are fragile in spite of a massive foreign-reserve balance on the national level.

Delicate balance…

The risk with China is that they need ALL of these controls to stay in place.  If one or more of them were to fall, the entire system may be put at risk.

As long as the economy continues to grow at double digit rates, then it could be possible for China to keep all of these controls in place for many years to come.  But, it is possible that someday the economy will to fall into recession (not just below 7% growth, but a true recession).  If that day does come, then more discussion is needed to look at how China might change as a result.  Will any /all of these controls crumble?  If so, then how would that effect the US?  Would China still want to purchase US treasuries?  Would US interest rates shoot upward?  How would global supply chains be reconfigured?  Would countries like Brazil become more competitive in manufacturing?   Who would take China’s place as the next manufacturing powerhouse?

As of yet, the Chinese have not slowed their purchases of US assets, in spite of what you may have read in the New York Times (here).

(yes, I admit that looking at this scenario is a bit like looking at a “black swan” / “fat-tail” probability in statistics…but so was the global credit crisis)…

….

On a personal level, I think China is one the most complex, and interesting cases …and is surely a long-term growth story (as Jim Rogers said, it would be like investing in New York in 1900…if you invest for the long run, its surely one of the best investments out there).

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by Brian Butler

How short-term interest rate cuts by the Fed can stimulate the economy

2008/07/21 in Tumblr blog imports

Every time you hear that the Fed is cutting interest rates (or, more accurately “targeting” lower interest rates), how exactly does that lead to a stimulation of the market economy?  The key to answering this question lies within your understanding of the “yield curve“, and how commercial banks make money.

Commercial Banking Business Model:

The business model of commercial banking is often described as “borrow short, and lend long” ….meaning that bankers borrow money in the short term (from your banking deposits), but then lend out money in the long term (mortgages).  Banks make a profit based on the difference between these two rates, which are shown graphically in a “yield curve“.

In general, banks have more opportunity to make profits if the “yield curve” is steeper in slope.   This is obviously because if they make money on the difference between short and long term rates, then they want the curve to show the greatest short and long-term difference (as a steep yield curve would do).

When the Fed cuts short term interest rates, that has the effect of essentially steepening the yield curve (by lowering the short term).  Because the yield curve gets steeper (with a greater difference between short and long term rates), it becomes more profitable for banks to lend out money for long term investments.  By doing so, banks stimulate the economy by funding investments by businesses and individuals.   If, on the other hand, the yield curve were negative (lower long term rates than short term rates), then the banks would have no incentives to lend money, and the economy would stall.

For more information, please see GloboTrends wiki:

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Why is inflation so bad? case of Zimbabwe

2008/07/03 in Tumblr blog imports

Economists are constantly warning us about inflation. They say that the Fed must raise interest rates to fight inflation, but politicians and business leaders cry about the slowing of the economy due to rising interest rates.

In most of my lifetime, I have never personally known the evils of hyperinflation, so its easy to become attracted to growth, and less fearful of inflation.  But, a quick look at countries currently fighting inflation is a great reality-check, and might get you calling for the inflation-fighters to sharpen their swords, and to do all they can to keep a lid on the inflation bug.

Example:  Zimbabwe 2008:   I recently read in the WSJ that in January, the government was forced to stop counting inflation, with the last published report being 100,580% per year (and was still rising quickly)!   At that time, a simple loaf of bread would cost 30 billion Zimbabwean dollars.   The soda vending machines had to all be turned off because it would take hours to put in the billions of coins needed to get one can of coke, if you could find one.   Imported from South Africa, a can of coke was selling for 15 billion Zimbabwean dollars on the black market.  Civil servants, however, were tied by a law that limited their bank withdrawals to just 25 billion per day (less than 2 cans of coke).   In response to hyperinflation, people were forced to go shopping with huge baskets of money, and to spend it as fast as they could, before it became worthless.  In order to print the paper fast enough, the government was importing special paper from Germany by the container load, and it would quickly loose all value as soon as it went out into circulation.

This case is clearly an extreme, brought about by mis-management of the economy, political repression, and an economic crisis.  But it does give an economic warning about the evil potential of hyper inflation, and a reminder of what can happen if the government keeps on printing more money, and does not do enough to control the money supply.

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