Is QE2 the Road to Zimbabwe-Style Hyperinflation? Not Likely

Unlike Zimbabwe, the U.S. can easily get the currency it needs without being beholden to anyone. But wouldn’t that dilute the value of the currency? No.

A month ago, the bond vigilantes were screaming that the Fed’s QE2 would be the first step on the road to Zimbabwe-style hundred trillion dollar notes. Zimbabwe (the former Rhodesia) is the poster example of what can go wrong when a government pays its bills by printing money. Zimbabwe’s economy collapsed in 2008, when its currency hyperinflated to the point that it was trading with the U.S. dollar at an exchange rate of 10 trillion to 1. On November 29, Cullen Roche wrote in the Pragmatic Capitalist:

Back in October the economic buzzwords had become “money printing” and “debt monetization”. . . . [T]he Fed was initiating their policy of QE2 and you’d have been hard pressed to find someone in this country (and around the world for that matter) who wasn’t entirely convinced that the USA was about to send the dollar into some sort of death spiral. QE2 was about to set off a round of inflation that would make Zimbabwe look like a cakewalk. And then something odd happened – the dollar rallied as QE2 set sail and hasn’t looked back since.

What really happened in Zimbabwe? And why does QE2 seem to be making the dollar stronger rather than weaker, as the inflationistas predicted?

Anatomy of a Hyperinflation

Professor Michael Hudson has studied hyperinflation extensively. He maintains that “every hyperinflation in history stems from the foreign exchange markets. It stems from governments trying to throw enough of their currency on the market to pay their foreign debts.”

It is in the foreign exchange markets that a national currency becomes vulnerable to manipulation by speculators.

The Zimbabwe economic crisis dated back to 2001, when the government defaulted on its loans and the IMF refused to make the usual accommodations, including refinancing and loan forgiveness. Zimbabwe’s credit was ruined and it could not get loans elsewhere, so the government resorted to issuing its own national currency and using the money to buy U.S. dollars on the foreign exchange market. These dollars were then used to pay the IMF and regain the country’s credit rating. According to a statement by the Zimbabwe central bank, the hyperinflation was caused by speculators who charged exorbitant rates for U.S. dollars, causing a drastic devaluation of the Zimbabwe currency.

But something darker seems also to have been going on. Timothy Kalyegira, a columnist with the Daily Monitor of Uganda, wrote in a 2007 article:

Most observers and the general public believe Zimbabwe’s economic crisis was brought about by Mugabe’s decision to seize white-owned commercial farms in 2000. That might well be true. But how about another, much more sinister element . . . sabotage?

Kalyegira asked how a government “with the same tyrant called Mugabe as president, the same corruption, and same mismanagement, kept inflation down to single digit figures [before 2000], but after 2000, the same leader, government, and fiscal policies suddenly become so hopelessly incompetent that inflation is at the latest reported to be over 500,000 percent?”

Canadian commentator Stephen Gowans calls it “warfare by other means.” Devaluing the enemy’s currency has been used as a war tactic historically. It was used by Napoleon against the Russians and by the British against the American colonists.

In 1992, financier George Soros showed how it was done, when his hedge fund virtually single-handedly brought down the British pound. His fund sold short more than $10 billion worth of pounds, forcing the Bank of England to devalue the currency, earning Soros an estimated $1.1 billion and the title “the man who broke the Bank of England.” In 1997, the UK Treasury estimated the cost at 3.4 billion pounds.

One wonders, then, if it is just coincidence that the Open Society Initiative for Southern Africa is a Soros-affiliated organization. According to Wikipedia, its director for Zimbabwe also directs the Zimbabwe Congress of Trade Unions, the main force behind the founding of the Movement for Democratic Change, the principal indigenous organization promoting regime change in Zimbabwe.

War by Other Means

The push for regime change in Zimbabwe was detailed by Stephen Gowans in a March 2007 article posted on Global Research. He wrote:

Before 1980 Zimbabwe was a white-supremacist British colony named after the British financier Cecil Rhodes, whose company, the British South Africa Company, stole the land from the indigenous Matabele and Mashona people in the 1890s. . . .

Ever since veterans of the guerrilla war against apartheid Rhodesia violently seized white-owned farms in Zimbabwe, the country’s president, Robert Mugabe, has been demonized by politicians, human rights organizations and the media in the West. . . .

I’m going to argue that the basis for Mugabe’s demonization is the desire of Western powers to change the economic and land redistribution policies Mugabe’s government has pursued; . . . and that the ultimate aim of regime change is to replace Mugabe with someone who can be counted on to reliably look after Western interests, and particularly British investments, in Zimbabwe.

Timothy Kalyegira concurred in this theory, observing:

A former undercover operative John Perkins recalled events that are strikingly familiar to what we see in Zimbabwe today: “[In] 1951…Iran rebelled against a British oil company that was exploiting Iranian natural resources and its people…An outraged England sought the help of her…ally, the United States…Washington dispatched CIA agent Kermit Roosevelt…to organize a series of …violent demonstrations, which created the impression that [Iranian Prime Minister] Mossadegh was both unpopular and inept. (Confessions Of An Economic Hit Man, Ebury Press, 2005, page 18) Clearly, Mugabe’s capital crime was to displace White privilege in Zimbabwe and personally stand up to the White establishment in London and Washington.

This is not to condone any atrocities of which the Mugabe government stands accused, or to overlook the fact that breaking up the white-owned farms and delivering them to unskilled workers was a disaster for the economy. The original black workforce did have the necessary skills, and if the farms had been transferred to cooperatives owned by them, little harm would have been done to the economy.

The narrow issue considered here is whether the Zimbabwe hyperinflation was the result of the government printing money to fund its budget. In fact, the government was printing money to buy the foreign currency needed to pay debts owed in a foreign currency, something that subjected it to the whims of speculators.

The U.S. Is Not Zimbabwe

Even if Zimbabwe’s hyperinflation was the result of currency manipulation rather than exploitation by corrupt politicians, couldn’t the same thing happen to the U.S. dollar?

The answer is, not likely. The U.S. does not owe debts in a foreign currency over which it has no control. It can issue bonds payable in its own currency.

Today that currency is issued by the Federal Reserve, which is privately owned by a consortium of banks; but the Fed has been at least semi-captive ever since the 1960s, disgorging its profits to the Treasury. Its website states, “Federal Reserve Banks are not . . . operated for a profit, and each year they return to the U.S. Treasury all earnings in excess of Federal Reserve operating and other expenses.” The Federal Reserve Act provides that it can be modified or rescinded at any time, so Congress retains ultimate control.

Randall Wray, Professor of Economics at the University of Missouri-Kansas City, writes that “involuntary default is, literally, impossible for a sovereign government.”

The U.S. does not have to rely on foreign investors even to buy its bonds. If the investors are not interested, the central bank can buy the bonds. That is, in fact, what the Fed’s second round of quantitative easing is all about: issuing $600 billion for the purchase of long-term government bonds.

Unlike Zimbabwe, which had to have U.S. dollars to pay its debt to the IMF, the U.S. can easily get the currency it needs without being beholden to anyone. It can print the dollars, or borrow from the Fed which prints them.

But wouldn’t that dilute the value of the currency?

No, says Cullen Roche, because swapping dollars for bonds does not change the size of the money supply. A dollar bill and a dollar bond are essentially the same thing. One bears interest and is a little less liquid than the other, but both are obligations good for a dollar’s worth of goods or services in the economy. If the bondholders had wanted cash, they could have cashed out the bonds themselves. They don’t have any more money to spend, or any more incentive to spend it, when they’ve been cashed out by the government than when they were holding bonds.

Moreover, adding money to the money supply cannot hurt the economy when the money supply is shrinking, as it is now. Most money today consists simply of bank credit, and bank credit is shrinking because banks are deleveraging. Bad debts are wiping out capital, which wipes out lending capacity. QE2 is just an attempt to fill the empty liquidity pitcher back up — and a rather feeble attempt at that. Financial commentator Charles Hugh Smith estimates that the economy now faces $15 trillion in writedowns in collateral and credit, based on projections from the latest Fed Flow of Funds (September 17, 2010). Based on his projections, it might be argued that the Fed could print enough money to refinance the entire federal debt without creating price inflation. (The current inflation in commodity prices is due to other factors, as was discussed in an earlier article here.)

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, wrote recently concerning the federal deficit:

There is no reason that the Fed can’t just buy this debt (as it is largely doing) and hold it indefinitely. If the Fed holds the debt, there is no interest burden for future taxpayers. The Fed refunds its interest earnings to the Treasury every year. Last year the Fed refunded almost $80 billion in interest to the Treasury, nearly 40 percent of the country’s net interest burden. And the Fed has other tools to ensure that the expansion of the monetary base required to purchase the debt does not lead to inflation.

This means that the country really has no near-term or even mid-term deficit problem. The current deficit is a positive. In fact, if it were larger we would have more jobs and growth. Furthermore, there is no reason that the debt being accumulated at present should pose any interest burden on future generations. In this vein, it is worth noting that Japan’s central bank holds debt amounting to almost 100 percent of that country’s GDP. As a result, Japan’s interest burden is considerably smaller than the United States’s, even though Japan’s debt is almost four times as large relative to the size of its economy. [Emphasis added.]

Although Japan’s relative debt is almost four times as large as ours and its central bank holds enough to equal nearly 100% of its GDP, investors are not fleeing the yen or driving the economy into hyperinflation. In fact, Japan still can’t pull itself out of DEFLATION, despite massive quantitative easing. The country still has willing trading partners and is still the third largest economy in the world, an impressive feat for a small island.

If the Fed were to follow the lead of Japan and hold federal debt equal to the country’s gross domestic product, the Fed would be holding $14.75 trillion in federal securities, enough to refinance the ENTIRE U.S. federal debt of $13.8 trillion virtually interest-free.

The federal debt hasn’t been paid off since the 1830s under President Andrew Jackson. It is just rolled over from year to year. An interest-free debt rolled over indefinitely is the functional equivalent of the government issuing money itself.

Andrew Jackson would have said the government SHOULD be issuing the money itself, rather than borrowing from banks that issue it. If Congress gave itself the right under the Constitution to issue money, he said, “it was conferred to be exercised by themselves, and not to be transferred to a corporation.”

Indeed, that may be why the U.S. dollar has been going UP since QE2 was initiated, while the Euro has been going DOWN. EU governments are doing what the inflation hawks want them to do: cut back on services, privatize their pension money, and otherwise engage in austerity measures to balance their budgets. The effect has been to depress their economies and throw them deeper and deeper into debt, with nowhere to get the extra cash needed to pay the expanding debt and interest burden.

The U.S. and Japan are exploring another model: allowing their currencies to expand to meet the needs of their economies. This was, in fact, the original money system of the American colonists. It was revived by Abraham Lincoln to avoid a crippling war debt, after which it was dubbed the “Greenback solution.”

Ellen Brown is an attorney in Los Angeles and the author of 11 books. In Web of Debt: The Shocking Truth about Our Money System and How We Can Break Free, she shows how a private banking cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Read other articles by Ellen, or visit Ellen's website.

14 comments on this article so far ...

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  1. MichaelKenny said on December 3rd, 2010 at 9:04am #

    A sure sign that the attack on the euro is failing is when the attackers start claiming that the visible signs of that defeat are really what they wanted to achieve all along! It’s not that they have failed, it’s just that they lied about their real intentions to fool their opponents. In fact, the drop in the euro is what has saved it. The real target of the attack was Germany, where, it was hoped, the cost of the bailouts would set off a taxpayer revolt, bringing down the euro. In fact, the drop has created an economic boom in Germany, with unemployment down and economic forecasts being revised upwards. People who were out of work are finding jobs. People who feared for their jobs are breathing easier. At that point, a few billion to rescue the goose that’s laying the golden eggs is an investment that comes back to them tenfold.
    How relevant the European situation is to the US is open to debate. What is happening in Europe is that it is the object of a political attack, using an economic weapon, namely, sovereign debt, and that attack is emanating from the US itself. Thus, the weapons Europe uses in its defence have to be political, not economic. The trap that has been set for Europe is precisely that it should treat the problem as purely economic and American soothsayers have been flooding the media with free advice to to just that. Thus, precisely because the US is not the victim of an external political attack, one would expect the response to its problems to be different.
    That Soros might be behind the attack on the euro is plausible. The scenario in regard to the pound is very like what has been happening in regard to the euro. Equally, Michael Hudson (no friend of the euro!) now works for a Soros-funded foundation and his failed attack on Latvia was also funded by Soros. It’s interesting to watch the way Soros has gone, almost overnight, from being the “good guy” of the Israel Lobby to being an ogre who is blamed for everything.

  2. commoner3 said on December 3rd, 2010 at 2:11pm #

    Ellen Brown wrote:
    “But wouldn’t that dilute the value of the currency?

    No, says Cullen Roche, because swapping dollars for bonds does not change the size of the money supply. A dollar bill and a dollar bond are essentially the same thing. One bears interest and is a little less liquid than the other, but both are obligations good for a dollar’s worth of goods or services in the economy….”
    ——————————————————————————
    Ms. Brown:
    This logic does not hold the water whatsoever. This swapping was done with newly PRINTED dollars and NOT with already existing dollars. So, in my humble opinion, this QE2 is inflationary. The money supply has increased by the amount of QE2 and that money went to the banks to help keep the mortgage rates down to prevent a free fall houses prices. In short QE2 is done for the banks and nobody else
    What is happening now is that the ruling elite will try to metigate that inflation by “austerity measures” , which means shaving more money from the average people. Freezing Federal employees’ salaries, the proposed cuts in Social Security and Medicare etc etc …is first steps in that direction and the economy will stagnate and it might shrinks!!!

  3. Rehmat said on December 3rd, 2010 at 3:19pm #

    Is it another Zionist-bashing of Zimbabwe?

    Zimbabwe crisis, like the rest of the African and some Asian countries – are the creation of western colonial legacy.

    Zimbabwe was not topic of the Zionist-controlled mainstream media until it changes its friendship from Israel to Iran.

    Mugabe’s journey from Tel Aviv to Tehran
    http://rehmat1.wordpress.com/2010/04/27/mugabes-journey-from-tel-aviv-to-tehran/

  4. bozh said on December 3rd, 2010 at 4:00pm #

    but if all people who want to be in on decision to print or not to print additional supply of money wld be allowed to participate in such business, i do not see a problem arising.

    and if we wld be allowed to participate in managing our money [it seems, it is "theirs" now] we cld also be in on how many hospitals, buses, soldiers, wmd, warships, etc., we need.

    fat chance supremacists wld ever give up their ‘rights’ to lord over us. so. theorizing about role of banks and use of money appears hunting for snark! and with intent? tnx

  5. Deadbeat said on December 3rd, 2010 at 5:07pm #

    commoner3 writes …

    This logic does not hold the water whatsoever. This swapping was done with newly PRINTED dollars and NOT with already existing dollars. So, in my humble opinion, this QE2 is inflationary. The money supply has increased by the amount of QE2 and that money went to the banks to help keep the mortgage rates down to prevent a free fall houses prices. In short QE2 is done for the banks and nobody else

    After re-reading this I have to agree with commoner3. QE3 is obviously inflationary. What is going on is that Keynesian policy is being conducted by the Fed and recently Bernanke asked the Congress to provide fiscal stimulus.

    The problem is that since the 1970’s the policy from the U.S. government “poisoned-pilled” classic Keynesian stimulus in favor of debt inflation both public and private. Even if there was a direct Keynesian stimulus, people are so far into debt that they still would not have enough disposable income to stimulate the economy. The money would be going through their hands and into the hands of the banks, debt collectors, and lawyers.

    However since Washington is still heavily influenced by Reaganomics, there is no political to redistributed direct cash payment to people. Even now extending unemployment benefits is dead in the water and it looks as if the wealthy will get an extension of the Bush tax cuts. Much of Obama’s fiscal stimulus were in the form of tax cuts for the upper tier.

    What QE2 is designed to do is to inflate the economy via asset prices. Since much of the new dollars goes to the banks it is the reason why the stock market is still trading well over 11,000 and why speculation still remains rampant. This gives the banks and other Capitalists the ability to BUY UP even more assets thus furthering the consolidating of the market that then leads to HIGHER prices and the economy becomes even more concentrated (Monopoly Capitalism) with the need for fewer jobs and thus higher unemployment.

    What is needed is REDISTRIBUTION* however that “ugly” word is not within Ms. Brown lexicon nor is it in the circle that she appears (like Max Keiser) while these same right-wingers promote even further speculations in precious metals driving up its prices.

    Ms. Brown writes …

    Andrew Jackson would have said the government SHOULD be issuing the money itself, rather than borrowing from banks that issue it. If Congress gave itself the right under the Constitution to issue money, he said, “it was conferred to be exercised by themselves, and not to be transferred to a corporation.”

    I’m not so sure that even if the government was issue its own currency that would make any difference to the current Capitalist crisis. The interest that the government pays to the FED is refunded back to the Treasury so that is essentially a wash and the FED is audited every year so they are held accountable.

    The problem is that the Congress has been held hostage by ideologues and demagogues that has crippled fiscal policy have supported policies that have favored the rich and attacked the working class for the past 40 years. And even if the government did provide a real stimulus the economy behaves in such a chaotic manner that there is no guarantee that the fiscal stimulus would be put to use where it would be the most needed — like in poor minority communities.

    The main reason for the large debts accumulated for the past 30 years are as following:

    [1] Tax cuts for the rich…
    This provided more money for the rich to speculate thus inflating the power of the financial sector.

    [2] Attacks on workers thus furthering their exploitation…
    Workers were left having to BORROW money (rising personal debt) in order to make ends meet. This also allow the financial sector to lay claims to workers income and thus even further diminished disposable incomes. The attack on workers also diminished their political power.

    [3] Huge military expenditures.

    If you reverse the aforementioned trends you’ll see some improvements. However since in the short term that seems unlikely commoner3 is absolutely correct that QE2 will be paid for via AUSTERITY.

    * Actually what is needed is a revolution and totally scraping Capitalism but that’s another discussion. But even if you apply “Liberal” solutions what is needed is not only a repeal of the Bush tax cuts but the Reagan tax cuts as well. Even a right-winger like Kevin Phillips recognized this in back 1989 with his book The Politics of the Rich and Poor.

  6. Deadbeat said on December 3rd, 2010 at 5:12pm #

    bozh writes …

    fat chance supremacists wld ever give up their ‘rights’ to lord over us. so. theorizing about role of banks and use of money appears hunting for snark! and with intent? tnx

    You’re right that the supremacist are not going to give ground but ignorance is not bliss. What you label as “theorizing” is called discussion, debate, learning and understanding. Most people don’t understand the complexities of this issue and can be told anything. Commoner3’s remark help alter my initial opinion of this article.

  7. bozh said on December 3rd, 2010 at 5:50pm #

    deadbeat,
    i think all of u r just making conclusions about how money is being used. which is ok. but do say that u are concluding. u have concluded that money shld go. i have concluded that money is useful; thus, let’s use it!

    in talking about tax cuts, people offer guesses how is it going to do this or that. so, what’s wrong with saying: hey, i am merely guessing. or, say:
    i’l respect ur guess if u respect my guess.
    i guess that money is controlled by the top u.s class. so, if that indeed be so, and an inquiry by representatives of all classes determines that it is so; then, the same people can enact the law that all americans hav ethe right to control it.
    u do not do this, the first baby step, why talk and only talk about baby’s 100th step towards liberation of americans.
    can’t people on this site see that americans r not free! tnx

  8. PatrickSMcNally said on December 4th, 2010 at 4:28am #

    > Andrew Jackson would have said the government SHOULD be issuing the money itself, rather than borrowing from banks that issue it. If Congress gave itself the right under the Constitution to issue money, he said, “it was conferred to be exercised by themselves, and not to be transferred to a corporation.”

    Well at least this quote seems to have some kind of source unlike a lot of other popular Jackson “quotes.” But it might be worth reviewing just a few facts about Jackson, who has much more in common with Greenspan and Bernanke than popular myth seems to recognize.

    Jackson vetoed the charter of the Second Bank and withdrew funds so that the Second Bank was destroyed. The result was that local and state banks took over and there was a huge expansion of credit and speculation which led to a boom in cotton production and other manufacturing. This was related to the undeveloped nature of much of the USA at that time. Jackson was a fervent advocate of th ethnic cleansing of American Indians, as well as a supporter of slavery. It was this ongoing imperial conquest of the Western Frontier which created the room for endless growth of capital, room which our world does not have today.

    But once the speculation boom which Jackson set off, by derailing the Second Bank, had got going the result was massive inflation and state debts. Paper money was printed wildly by private banks which had no assets to back the notes up, and that was directly set in motion by Jackson’s vetoing of the Second Bank. This led to the panic of 1837 and a prolonged depression afterwards. Jackson was a stupid ideologue just like Ronald Reagan. The only thing which has saved his reputation was imperial conquest in the west that allowed the USA to gain new resources for greater expansion of capital. Reagan didn’t have a Western Frontier which he could go yahooing across, and that’swhy the long-term effects of Reagan stay with us whereas Jackson has quietly faded into the sunset.

    It’s funny that many of the same people who can cover Jackson with apologetics for having set off a wild inflationary boom of speculation through deregulation (which is what his assault on the Second Bank was) will today cast stones at Greenspan & Bernanke for not following the example of, umm, Jackson? Pfft.

  9. Deadbeat said on December 9th, 2010 at 5:08am #

    bozh writes …

    deadbeat,
    i think all of u r just making conclusions about how money is being used. which is ok. but do say that u are concluding. u have concluded that money shld go. i have concluded that money is useful; thus, let’s use it!

    I guess I don’t follow your logic. Aren’t you making a conclusion that money is “useful”. Can you explain why you believe that as clearly Capitalism is demonstrating the uselessness of money unless by “useful” you mean as a means of control.

  10. bozh said on December 9th, 2010 at 9:18am #

    DB,
    i have said just that. i conclude that money is useful! to me, money is quite useful.
    that most people r crooks, is another matter. money symbolizes trust. so does handshake, signature.
    trust, to me, is our greatest asset. almost utterly destroyed, tho. mostly by clerico-noble class of life. and in each society to a different degree.

    cld one day—millennia from now; hopefully starting tomorrow– money be replaced wit signature or handshake? i say yes! tnx

  11. Liberte said on December 9th, 2010 at 1:23pm #

    The problems related to money are intrinsict to its violent monopolization by central banks. It is really that simple.

    Gentlemen such as PatrickSMcnally can produce as much theoretical Marxist propaganda as you desire but cannot produce an ounce of food for his neighbor. Had he studied the latter rather than the former he could have. I was his individually driven motivation to study one, and not the other. It is alittle selfish, but there is nothing wrong with this, we are all alittle selfish.

    He then decides to peddle Marxism as though it has any viability in relation to humanity, or human nature. But he will dillegently attempt to coerce and influence the minds of any who read his posts. This is alittle authoritarian, but there is nothing wrong with this, we are all alittle authoritarian.

    All humans are alittle selfish and authoritarian therefore government cannot work. We don’t need banking monopolies, we don’t need socialism or capitalism, we need the freedom to grow our own food and decide on what will be our own money and that’s about it.

    Last thought, all of your tax dollars go to killing people, locking people up in cells and making other people rich. It doesnt help the poor people, dont be naïve.

  12. Deadbeat said on December 9th, 2010 at 2:04pm #

    we need the freedom to grow our own food and decide on what will be our own money and that’s about it.

    That’s describes Socialism. You must be a socialist.

  13. Liberte said on December 9th, 2010 at 2:17pm #

    I hear what you are saying; “get in van, we have candy” But I don’t want to work on the Kibbutz.

    en.wikipedia.org/wiki/Kibbutz.

  14. Deadbeat said on December 9th, 2010 at 2:52pm #

    I hear what you are saying; “get in van, we have candy” But I don’t want to work on the Kibbutz.

    Neither would any true Socialist like yourself since Kibbutzism is grounded in Zionism and I assume that you’re no Zionist like Noam Chomksy.