n 2006 Zimbabwe, people abandoned storing spare cash in savings accounts in lieu of purchasing bags of corn meal or sugar. The staple foods held value better than currency in the country’s turbulent economy. Two years later, buying a loaf of bread in Zimbabwe would require paying with a wheelbarrow of cash. At the crisis’ peak in November of 2008, prices skyrocketed into the second worst period of inflation the world had ever seen.
It’s 2019 and Venezuela is on the brink of similar circumstances. In early June The Guardian reported that Caracas was releasing new banknotes for the second time in the past two years. Venezuela’s initial decision to cut five zeroes off its currency in August 2018 paralleled actions taken by Zimbabwe in February 2009, when the South African nation made the drastic decision to remove a whopping twelve zeroes from its currency after inflation had peaked a few months earlier. Similarly, the food shortages that struck Zimbabwe during the first decade of the 21st century are striking Venezuela, where grocery stores are haunted by empty shelves.
On their separate paths to complete economic disaster, both Zimbabwe and Venezuela employed an economic strategy used to create an increase in short-term revenues. In the best-case scenario, this strategy can boost output above stagnant growth rates or offset the effects of an economic shock. In the worst-case scenario, this strategy can transform economic concerns into long-term nightmares. The strategy in question? A maneuver that sounds like it could be a child’s solution to economic panic.
When Zimbabwe and Venezuela found themselves on the brink of economic crisis, they turned to printing money. The strategy is known as creating seigniorage. Seigniorage is the revenue a government receives from printing money. At its basic level, the concept of seigniorage is based on the fact that it costs the government less than a dollar to print a dollar. In actuality, “printing money” can be used to help countries create additional revenues when other options are less desirable or entirely unavailable.
When governments print additional money, however, they increase inflation. And though this inflation is a mere side effect of a strategy designed to keep the economy moving in the wake of a short-term shock, it can lead to further economic consequences.
Hyperinflation, the phenomenon that has wreaked economic disaster in both Venezuela and Zimbabwe, is the worst possible outcome for a government that attempts to alleviate its economic woes by printing more money. Hyperinflation occurs when prices in a given country rise by more than 50% a month. Often sparked by war or revolution, periods of hyperinflation can also arise in economies where a “chronic weakness” is present. A single shock to the economy can prompt these weak economies to turn towards printing money as a mode of relieving economic crisis. But when governments print money, at a certain point, citizens start running from currency, choosing to hold value in staple foods or foreign currencies instead. The government then prints even more money, needing more and more domestic currency to pay its bills as inflation skyrockets towards hyperinflation.
Zimbabwe’s devastating period of hyperinflation began with agricultural redistribution policies in which government forces seized white-owned farms in order to right colonial wrongs. Agriculture revenue fell by $12 billion between 2000 and 2009 as output plummeted. During this period, GDP contracted 8.29%. The government attempted to make up for its large losses in output by printing money. It made things worse. In 2008, output was projected to reach just two-thirds of what had been its peak levels in 2000. That same year, inflation levels reached 80,000,000,000%.
Hyperinflation, the phenomenon that has wreaked economic disaster in both Venezuela and Zimbabwe, is the worst possible outcome for a government that attempts to alleviate its economic woes by printing more money.
Venezuela’s current economic crisis emerges from a heavy dependence on domestic oil. In 2014, the price of oil fell 70%. That same year, oil had made up 90% of the country’s export earnings.
Oil exports had once allowed Venezuela to fund generous social programs. In the wake of the oil price crash, the country had numerous spending obligations. When President Maduro began printing money to make up for the loss in output caused by the oil shocks, inflation spiraled out of control. In May 2019, inflation clocked in at almost 1,7000,000%.
In 2014, Japan’s Central Bank Chief Haruhiko Kuroda announced that Japan would be printing more Yen. Following the central bank’s announcement, the Japanese stock market soared. In Japan, printing money is just another way the country has tried to boost a sluggish economy that has been struggling with deflation since the 1990s.
Economic analyst Jared Dillian, writing for Forbes, speculates that the country’s money printing practices could even eventually lead to hyperinflation. Such claims, however, seem dubious when they are made about the third-largest economy in the world. Countries like Zimbabwe and Venezuela found themselves battling hyperinflation because printing more money was the only option they had for raising revenues in deeply malignant economies. In a developed nation like Japan, printing more money is a policy tool that is unlikely to result in economic peril. Analysts would be wise to turn away from Tokyo and pay attention to a country with chronic economic problems when they imagine where hyperinflation will strike next.