The Zimbabwe central bank over the weekend announced it is about to distribute a new $10 billion note. That's Zimbabwe dollars. One U.S. dollar will buy more than $5 billion Zimbabwe dollars, assuming you'd want them. After all, one Zimbabwe dollar will only buy two loaves of bread. Today. Probably only one loaf of bread by the time it gets into circulation.
That's what happens when a country creates too much paper money, or equivalent credit.
Zimbabwe is not a poor nation in terms of natural resources or literacy. Despite a troubled history since gaining independence in 1980, the former Rhodesia has one of the highest literacy rates on the African continent, at 90.5 percent. And it has a huge asset base of natural resources, with deposits of more than 40 minerals including gold, silver, platinum, copper, asbestos, as well as forest land.
Yet this country is in the midst of hyper-inflation, something few Americans can imagine. The inflation rate is estimated at 231 million percent annually! No one actually uses the currency, making the new notes a waste of the paper they're written on. The unemployment rate is more than 80 percent, and the economy is shrinking at an alarming rate.
OK, Zimbabwe is an extreme example of what happens when a despotic government takes over the economy. Germany, after World War I, was another example -- but also too far removed from our consciousness to make a current impact. Those images of German citizens pushing wheelbarrows full of currency down the street to buy milk are long forgotten, or a quaint memory.
Can't happen here:
It certainly couldn't happen here. Our financial leaders are much too smart. And so are we. (I always believe that, except when I catch Jay Leno "streetwalking" and realize how little our citizens know about current events, much less history.)
The fact that the Congressional Budget Office has just announced a $1.2 trillion budget deficit for the year makes little impact. The fact that the president-elect says the stimulus package will involve huge costs on top of that projected deficit is taken with a yawn. After all, we're America. Our dollar is still the world's strongest currency.
If we have to print or borrow our way out of our problems, the world will just have to understand. After all, they're "stuck" with the dollars they already have earned from selling "stuff" to us. That's the money they've loaned to us by buying Treasury bills, notes and bonds. They're even willing to settle for zero percent interest on these loans, which is "proof" of how much they like us and need us to keep our economy going.
As of July 2008, Japan and China led the list of countries owning U.S. Treasuries, with more than half a trillion dollars each. The U.K. owned $291 billion, and the oil-exporting countries collectively have about $18 billion in U.S. Treasuries. In all, foreign holdings of long-term Treasury securities amount to more than half of our outstanding long-term debt.
The kindness of strangers:
Of course, these figures do not include other dollar-denominated investments that are owned by foreign investors or countries, including equities or agency notes. Put it all together and, as Blanche DuBois would have said: "We live on the kindness of strangers."
Just how long will that "kindness" last? How long will the world be willing to lend to us in dollars, even as we print and borrow more? Right now, dollar-denominated assets have been disappearing "down the drain" faster than we can create them.
The disappearing dollar assets include: stock-market losses, real-estate losses, bank-capital writedowns and -- coming soon -- writedowns of "impaired assets" on corporate balance sheets. All point to a current problem of
, not inflation.
So the federal government continues the bailout, whether through TARP, sending money to automakers or directly to consumers. The world is allowing us to create new money, which countries continue to accept at face value while earning little or low interest. They're betting on us to succeed in restoring economic growth. They're learning they need us as much as we need them. For the moment, anyway. But they're not extending any more credit to Zimbabwe.
And that's The Savage Truth.
Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated. She was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. Savage currently serves as a director of the Chicago Mercantile Exchange Corp.