Zimbabwe Lessons

This is a current reserve note from Zimbabwe which was printed last year. How much is it worth in $USD? Well, that is all a matter of timing. In April of this year, you could have exchanged it for about $7. The following month, it could be exchanged for about $4. By mid-June of this year, the value had dropped to about $2. And now in July, it is probably approaching pennies. In the time that it takes to do a calculation, the value will drop further. Forget the fact that the official exchange rate is 250 to 1.

Zimbabwe provides a live look at what inflation can do to an economy. The WSJ estimates that Inflation is currently surging at an annual rate of 7,500% or more. An Associated Press article had estimates ranging from 4,500% to 9,000%. You get the point. The actual number doesn't really matter.

So when you hear that Zimbabwe has the best performing stock market in the world today, you can understand why. The Zimbabwe Industrials Index has surged from below 1 million at the beginning of the year to a record of 54 million on July 3. Needless to say, any investment would be in the red after accounting for inflation.

Beyond the numbers, the real problem is the standard of living in Zimbabwe. The country's economy has contracted about 30% since 1999. Basic necessities are in short supply. Hunger is spreading and the life expectancy is down to 35 years. People are fleeing Zimbabwe for South Africa in one of the largest illegal migrations in the world today.

Think that Zimbabwe is an exception and only possible in third world countries? Between WW1 and WW2, the German inflation rate exceeded one million percent. Or how about the USA? A dollar today is equivalent to only pennies from our grandparents' days. Take a look at the DJIA as measured in gold and not dollars. You will not see record after record as is commonly reported today by the financial community.

Watch this blog for much more on inflation and the problems facing all countries with paper based currencies. More importantly, I'll show you how you can protect yourself from these problems.

For more information on the Zimbabwe situation, check out the the two articles in the WSJ Article 1 and Article 2