When Money Destroys Nations

Money printing: the big picture

 

Money from Heaven will be the path to Hell. – Robert Wiedemer, Economist

 

Daniel’s warm eyes and greying hair contrasted with his tall, imposing frame. I could tell instantly that this senior banker was a successful, street-smart man. He was sitting across the table from me, explaining how clever it was for governments of the world to print money to repay their debts, and as the conversation turnedto my plans for this book, a puzzled look came across his face.

 

‘A book on Zimbabwe’s hyperinflation,’ he mused. ‘Why on earth would you write about that?’

 

His question surprised me. Zimbabwe, a once-prosperous nation, had been utterly ruined in a few short years – not by war or natural disaster, but by unrestrained money printing; the very action Daniel was advocating. I recounted to him what had happened in Zimbabwe that led it towards its extraordinary economic meltdown. As the government printed money to pay its debts, prices began to soar until stores everywhere emptied and everyone became hungry. Water supplies ran dry and electricity cut out. No one could get any fuel. The Zimbabwean way of life was destroyed; ordinary people became destitute and millions fled the country.

 

The account fascinated Daniel. As we shook hands and prepared to leave,he paused and asked, ‘With the vast money printing programmes in developed countries today, could any of them ever become like Zimbabwe?’

 

It’s a sobering question. The wealthiest countries of the world are printing money on an unprecedented scale – the very same strategy that led Zimbabwe to a predictable and severe economic disaster. This book examines the causes of Zimbabwe’s economic collapse, how it impacted people practically, and what

lessons it holds for nations around the world.

 

In researching Zimbabwe’s tragic story, I interviewed people from every sector of society. I met with senior central bank officials. Business leaders imparted their strategies. Farmers spoke about their heartache and pensioners told me their desperate stories. I received input from people from all walks of life. Over 75 Zimbabweans shared their detailed experiences with me. Their personal stories of hardship, resilience and ingenuity are heartbreaking and inspiring. Most have put themselves at risk by talking to me, so I’ve changed their identities in the many quotes throughout the book.

 

I then partnered with another economist, Russell Lamberti, who has provided critical and substantial input. 

 

In Part I, we unveil what happened in Zimbabwe, explaining why and how debt and money printing cause economic crises.

In Part II, we show how hyperinflation practically affected people from all walks of life, telling the dramatic and heartfelt stories of ordinary Zimbabweans.

Finally, in Part III, we discuss how money printing threatens to destroy the major currencies of the world and how this could affect you.

 

In total, from 1980 to 2009 Zimbabwe issued 82 different denominations of currency notes. Throughout the book, we have included each note in the order that they were issued, as visual aids to the inflation story.

Zimbabwe’s story gives us critical clues from which we have built a powerful framework for broader application to other countries generally. Much of the material has been developed from the numerous interviews I conducted.

 

While the principles established in this book are based predominantly on this particular case study, we also draw on other such cases in history as well as on sound economic principles. While no two episodes in economic history are ever identical, we found very similar patterns emerging during different historical cases of hyperinflation and these provide guidelines to assessing the threat of hyperinflation in other countries.

 

This is a rich and wide-ranging theme and we recommend that you read further on this topic. You can find a list of recommended reading and useful resources, as well as advisory services at WhenMoneyDestroys.com.

 

We trust that, after this journey, you’ll never think the same way about money and your future again.

 

Chapter 1: Bernanke’s panic

 

What has been will be again, what has been done will be done again; there is nothing new under the sun. – Ecclesiastes 1:9

 

September 2008. Autumn. New York. It was a race against time. Panic had spread across world markets in one of the scariest weeks in financial history. The United States – and therefore the entire world – was on the verge of an economic collapse that only two men could stop.

 

For the previous 18 months, American house prices had fallen, putting a huge strain on banks. A few major multinational banks had collapsed. First was Northern Rock in England, then Bear Stearns in New York, followed by a host of others. The financial system began to bend under the strain as 52 banks across

the globe either declared bankruptcy, were nationalised or merged with other banks in emergency takeovers. Trust in the financial system was evaporating.

 

Earlier in September 2008, Freddie Mac and Fannie Mae, two massive American mortgage lenders, were brought to the brink of insolvency. The authoritiesacted quickly and fully nationalised them in the hope that this would stop the financial rot from spreading. It didn’t.

 

Sunday, 14 September 2008. By this point, the fourth and fifth largest investment banks in the United States, Merrill Lynch and Lehman Brothers, were in crisis. In an attempt to stop further insolvencies, the regulators had been negotiating over the weekend for other banks to take them over. They managed

to force Bank of America to acquire Merrill Lynch, announcing it in the morning papers. But they couldn’t find a buyer for Lehman Brothers, despite desperate attempts to do so.

 

United States Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke had been working around the clock to avert disaster – a disaster, many would later argue, made possible by the very economic policies that Bernanke and Paulson had implemented in preceding years. The pressure

was relentless. Paulson was having sleepless nights and the stress led to a nasty gastric condition that caused him to throw up multiple times a day. He knew the dire consequences and later said of the failed Lehman Brothers sale, ‘I wasn’t quite sure what to say. I was gripped with fear. I called [my wife] and said,  “Wendy, you know, I feel that the burden of the world is on me and that I failed and it’s going to be very bad, and I don’t know what to do, and I don’t know what to say. Please pray for me.”’1 Monday, 15 September 2008. At 1:45 a.m., Lehman Brothers filed for bankruptcy.

 

The news was a dagger to the heart of financial markets. Banks around the world were bleeding money as depositors withdrew everything they could. The American banking and financial system was collapsing and would potentiallybdrag down the entire global financial system, with dramatic consequences.

 

Tuesday, 16 September 2008. Market mayhem ensued. American International Group (AIG), an enormous multinational insurer, was in dire straits. It insured banks for certain kinds of losses, and after the collapse of Lehman Brothers, the company didn’t have the money to pay out on its insurance – it

was broke. During the helter-skelter of financial panic, many believed that AIG’s bankruptcy would push the markets over the edge. It was unthinkable. Unwilling to take a chance, Ben Bernanke approved an injection of US$85 billion of newly printed money into AIG from the Federal Reserve.

 

Wednesday, 17 September 2008. Financial markets continued to unravel. The other investment banks were cracking under the pressure. Stock market prices plunged. Many expected another massive investment bank, Morgan Stanley, to be the next in line in a host of bank failures.

 

Thursday, 18 September 2008. The break-the-glass rescue plan that Paulson and Bernanke devised had been in discussion for nine months. Time was of the essence, and at 4:30 p.m. New York time, the pair hastily convened a meeting of congressional leaders. The United States government would borrow US$700 billion from local and foreign lenders to give in various ways as bailouts to troubled banks.

The lengthy meeting was attended by President George Bush and then presidential hopefuls Barack Obama and John McCain. As deadlock set in, Ben Bernanke warned, ‘If we don’t act immediately, we will not have an economy by Monday.’ George Bush warned that ‘if money isn’t loosened up, this sucker

could go down’. Henry Paulson even got down on one knee, begging the leaders to approve the plan.2 As the committee talked through the night, the urgency of the situation became clear. They eventually put aside their various political differences and agreed to the plan, which they called the Troubled Asset Relief

Program or TARP for short.

 

Friday, 19 September 2008. The paperwork for the TARP bailout plan was hurriedly put together to be passed into law, and with a calm and assured façade it was announced on CNBC at 3:01 p.m. New York time. 

 

The plan dressed the immediate wounds of the financial system, but it was only a hurried patch job. Stock markets continued to go haywire as banks worldwide continued taking strain, and it was clear that the authorities neededto come up with more money. Within a few weeks, on 26 November 2008, the

United States Federal Reserve initiated a plan that would eventually see it print a staggering US$1.7 trillion (US$1 700 000 000 000) of new money within 18 months, effectively giving it to the banks as a bailout. The money printing plan became known as quantitative easing, or simply QE (we discuss the detail of how quantitative easing works in the endnotes3).

 

In the weeks and months to come, central banks around the world, from Britain to China to Dubai to Japan, followed suit with their own money printing and bank bailout schemes. By 2014, America had printed over US$3.5 trillion since the 2008 crisis, not only to bail out the banks but also to fund its increasingly indebted government. To illustrate how large this number is, with the US$3.5 trillion, in 2008, the Federal Reserve could have theoretically been able to purchase all the listed companies in the United Kingdom, Germany and India combined!4

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