On April 12, 2009, the government of Zimbabwe officially abandoned its currency.
You probably remember the stories; starting in the early 2000s, the Zimbabwe central bank began printing massive quantities of money in order for the government to make ends meet.
This resulted in one of the worst episodes of hyperinflation in modern history.
It's no secret that this year has been a volatile one for the markets. The S&P 500 is down 18% year to date, while the Nasdaq Composite is off by 27% year to date. Meanwhile, the VIX, a key measure of volatility, is up 49% year to date at 24.72. However, it has spiked as Read More
Zimbabwe’s rate of inflation in 2001 was more than 100%. Prices basically doubled.
But that was nothing.
By 2003, inflation was nearly 600%. By 2006, more than 1,200%. The following year, more than 66,000%.
At its peak in 2009, Zimbabwe’s inflation was estimated at 89.7 sextillion percent, which looks like this:
Eventually the government finally capitulated and chose to abandon its currency altogether.
And for the next several years, Zimbabwe had no official currency.
People transacted in dollars, euros, South African rand, Chinese renminbi… any foreign currency they could get their hands on.
But a few months ago the government of Zimbabwe decided to give it another try.
They created a new type of currency they’re calling a “bond note”, which is basically
Zimbabwe dollar version 2.0.
It’s been barely two months since the bond notes debuted, but people are already losing confidence.
There was even a recent story in which a government agency refused to accept its own bond notes as a form of payment.
It seems Zimbabweans have adopted a ‘fool me twice, shame on me’ attitude. They’re skeptical.
The bond notes are supposed to trade at parity with the US dollar, i.e. a $5 Zimbabwe bond note is supposed to be the same as $5 USD.
The government has absolutely nothing to back up this assertion, other than the usual tactics of coercion and intimidation.
They’ve threatened to throw anyone in jail who’s caught trading bond notes at anything other than the official 1:1 exchange rate.
Naturally these threats have only spurred the creation of a black market where Zimbabwe’s bond notes are bought and sold at their real values.
Right now the bond notes are trading at 5% to 10% below the US dollar. But this is just the beginning.