Monday, July 30, 2007

How not to fight inflation

When inflation is high, the solution is not to print more money. That is the first and greatest explanation found in the cliffnotes held by any macro-economist. Stop digging when you are already in your grave.

Well, Zimbabwe's president, Mugabe,
never learned that lesson. His country due to his policies is seeing inflation rates in excess of 10,000% per year and his solution is to print more money.

President Robert Mugabe has promised to print more money to fund municipal projects, a government newspaper reported Saturday. The pledge came despite hyperinflation that has created severe shortages of cornmeal, meat, milk and other staples.

No one is selling goods because everyone knows that they can get a better price tomorrow or next week than today. The inflation expectation is a self-reinforcing cycle. And this is causing a massive crisis.

I have not been following Zimbabwe too closely; however to learn more, Hilzoy at Obsidian Wings is a go-to blogger for this information.

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