[1] http://m.youtube.com/watch?v=i35uBVeNp6c
[2] http://www.amazon.com/Eurozone-Dystopia-Groupthink-Denial-Gr...
Zimbabwe became a dystopian cliché of hyperinflation and societal breakdown, with 80% unemployment and 100% inflation per day. It is the current example we use when we summon up the absurdist "wheelbarrows of currency" imagery. Basically, they were limited to a barter economy, with a thick layer of authoritarian interference in what became a very limited system of production and distribution of goods & services.
To create a currency union that's sustainable, you have to commit to a fiscal union (where there is stable net wealth transfer from New York to Nebraska through things like social security), and/or to a very stiff amount of labor mobility & remittances (where internal migration to the site of available employment is as common as in the Dust Bowl). The EU did not have enough of the latter (for a bunch of reasons), and chickened out on the former; In that case failure was unavoidable, and credit availability simply delayed an inevitability.
You can give up 'monetary sovereignty' in a long-term stable manner and sustain a functioning economy if you're willing to do these things. The United States did. We have whole regions that would be depopulated without social security, Medicare, and welfare to keep the population alive without its manufacturing base. We have abundant internal migration.
But Zimbabwe is a whole other sort of thing. They didn't relinquish much of anything when they gave up their currency; They had to build a new economy from the foundations on up.
I have come to agree with this. I was a supporter of the Euro and Emu since the 1990s, but I think I've been convinced that trying have a single currency without full fiscal union is folly.
You should choose to either have balkanised currencies, or a federal financial bucket, meaning the richer countries subsidise the poorer ones.
We went with Option C in Europe, and I don't have a lot of confidence that the Euro can survive in the long run in the current system.
Each separate state in the US has a fixed exchange rate with each other (1 USD = 1 USD), but our fiscal policy is administered by a central authority that adjusts for overall US conditions, not just individual states.
The answer to the Zim problem is not the adoption of multiple currencies they don't control, though, unless they are just completely abandoning the goal of self governance altogether.
That may be exactly what they're doing. Mugabe can't live forever, and his cronies could well be selling the country off to China, with an exit strategy in place to spend the rest of their lives in comfort in a third country.
Retiring the domestic currency is an existing policy that this article is only tangentially about.
Adding the yuan to the set of currencies support by the government for public uses given the absence of a domestic currency is the subject of the article.
> Relinquishing sovereignty of your currency (or pegging it to another currency or commodity) only narrows domestic policy space.
Once your currency has so little credibility that no one is using it in practice, its advantage in terms of domestic policy options is minimal, anyway.
Hyperinflation in Zimbabwe was caused by agricultural mismanagement and cronyism. There's no reason they can't fix it except they have shit leadership. Adopting the Yuan DOES, I suppose, remove control from the shit leadership so maybe it's a great idea.
People have to trust you enough to use your new currency, though. Nobody in Zimbabwe is going to trust the government that far without a change in leadership.
The easiest way to do that in a situation where you are introducing a new currency is to impose land taxes in NewZims.
How will land owners obtain NewZims in order to pay their taxes? They will grow shit and sell it to people for NewZims.
How will people obtain NewZims to buy the produce? By working for the government which will pay in NewZims.
The only people who'll get paid in NewZims are government workers, and when they get paid they'll rush out to convert their NewZims to dollars that people are selling to pay taxes.
The only way this cycle stops is if the hassle and expense of currency transactions outweighs the distrust of the government's stewardship of the currency. Until that time the NewZim is trading at some huge multiple of the official exchange rate.
http://www.npr.org/sections/money/2010/10/04/130329523/how-f... (podcast and article but I'd recommend the podcast)
They invented a new "virtual currency", stabilized it, denominated goods and services in the virtual currency, built public trust in the conversion rate between the (stable) virtual currency and (unstable, still experiencing hyperinflation) regular currency, and then finally switched the country over to the new currency.
> Four economists wanted to create a new currency that was stable, dependable and trustworthy. The only catch: This currency would not be real. No coins, no bills. It was fake. "We called it a Unit of Real Value — URV," Bacha says. "It was virtual; it didn't exist in fact."
> People would still have and use the existing currency, the cruzeiro. But everything would be listed in URVs, the fake currency. Their wages would be listed in URVs. Taxes were in URVs. All prices were listed in URVs. And URVs were kept stable — what changed was how many cruzeiros each URV was worth.
This was not the only fix, though, as I understand it. The government also had to change its policies that were causing hyperinflation in the first place. However, inflation was continuing more than it should have because the public had lost trust in the currency and assumed it would debase in value every day. The finance ministry needed to regain trust, and the new currency and currency swap allowed them to do that.
>But, just as important, you have to stabilize people's faith in money itself. People have to be tricked into thinking money will hold its value.
Is the key. I don't see that happening in Zimbabwe until Cap'n Bob kicks the bucket.
Even in currencies which have notes and coins they only make up a single digit percentage of the total volume of money.
When governments spend, they do so by crediting accounts at a central bank account (ie. They spend their own currency into existence) and taxation is the opposite of this.
The upshot of this is that governments don't need to tax before they can spend (in fact it's the opposite), are not constrained in their fiscal policy by "raising revenue" and have danger of insolvency so long as they only issue debt denominated in their own currency.
People need to obtain dollars from somewhere. If the total tax liability in NewZims exceeds the number of dollars obtainable then people will have no choice but to use it.
Also of note is that strong banking institutions are invaluable in this process. If people owe money in NewZims because of money created through private sector lending they'll also need to obtain them from somewhere in order to pay those debts. Making it illegal for banking institutions to hold accounts in currencies other than the national currency is also a means of avoiding this problem (ie. if people want to use banks they need to hold NewZims).
Of course this all hinges on the ability of the sovereign to actually impose sufficient liabilities on the populous in the first place and it would take time for the new currency completely replace the foreign ones but it's doable and is the only road to long term repair of a nation unless they're accepting what amounts to being colonised again.
You can't have sovereign government without sovereign currency.
Doesn't allowing multiple currencies have all the problems of bimetallism?
I don't think there's ever been any confusion that the adoption of the Euro limits member countries' domestic policy options; people in Europe may have differences of opinions about whether this is a good tradeoff for having a common currency and increasing Eurozone-level policy options, but I don't think many of them fail to realize that limiting local policy options is an effect of the Euro.
OTOH, there's a difference between an upward transfer to a higher-level government that is still accountable to your citizenry (even if their voice is diluted because it is a higher-level government with broader scope) and outsourcing monetary policy to an external issuer.
They will be better off switching to their own currency, after their government stop abusing the country.