From Hyperinflation to Deflation

I have just lived in a hyper-inflationary situation for a few years. A a matter of fact, Zimbabwe has probably been the country with the highest rate of inflation in History. The actual rate is unimportant, when a loaf of bread costs 30 trillion dollars, the problem for the ordinary citizen lies elsewhere. 

When one thinks that it was less than six months ago that the Reserve Bank cut 10, that´s right, ten zeroes off the currency and for a few brief days, the dollar US hovered around 4,500, then things start getting funny. 

Again, not even 2 years ago, the Reserve Bank cut another 3 zeroes off the currency of the time. That is a total of 13 zeroes off, and still a loaf of bread is 30 trillion Zimbabwean dollars.

But the real problem is that the salary of a Teacher, or a Nurse, is also 30 trillion. That is to say their monthly salary doesn´t cover a single loaf of bread. The ZANU-PF solution: you simply make bread unavailable. You can´t find bread in Zimbabwe today.

After that experience, I come back home to Europe and find myself in a deflationary situation. All in a matter of hours! Prices of nearly all goods and services are falling quite sharply, and people are still not buying. Most European governments´ solution: spend their way out of recession and deflation. Wrong choice again! 

As one of my favorite blog writers reminded us all yesterday, Margaret Thatcher once said:  “The problem with Socialism is that you eventually run out of other people’s money”

Today I have to think that something is really very wrong with this world we live in. 

Dim economic outlook!

Prieur du Plessis who I read every day and have come to respect, extensively quotes today from a report from Albert Edwards, strategist for Societé Generale. You can read the full report if you click on the title of this post. 

Prieur´s blog, Investment Postcards is accessible from my Blog roll on the sidebar next to this post as always.

And it certainly makes for interesting reading! 

Edwards’s “Global Strategy” report is sub-titled “Technicals say it is time to bail out. Cut exposure and prepare for rout. US depression looking likely. China’s 2009 implosion could get ugly.” 

What has really impressed me of his views is the mention to the possibility of China imploding and the internal situation turning into chaos. Their exports have been so drastically reduced that they could be tempted, to avoid internal violence and riots, to devalue the yuan, thus starting a 1930s style Trade War.

There are, however, still indications that Chinese officials are prepared to go along doing the " right thing". They have too much invested in our markets to want to go it alone. But China is also a political dictatorship and one has to wonder the extent they might be prepared to go to to maintain the regime in place if things start going very wrong....