Wednesday, July 7, 2010

Zimbabwe Money Washing

Found this article pretty interesting.

Basically, with an inflation rate of a billion percent, the US dollar is the de facto currency of Zimbabwe and many other countries that cannot maintain stable price controls. The reason for this is that citizens trust the value of the US currency rather than the rapidly inflating currency of their own country.

The effect is that money stays in circulation for really, really long periods of time. And we are talking about physical currency here, I am not sure if people accept checks for US dollars in Zimbabwe.

The effect is that the money supply for these dollars is fairly stable, so prices remain constant in US dollars, but the money is really, really stinky. People hide it in their shoes and other places, and it will exchange hands until it falls apart.

So the article talks about people washing money to get rid of some of the funk. Since US dollars are made out of cotton, this can be done the same way you would a pair of jeans, at the laundromat.

One interesting side effect is basically to prove the reverse of Greshems law, that good money will drive out the bad money; people will part with the stinky dollars and keep the good ones for themselves.

I love how an economic principal that started in the 15th century to explain currency debasement still has relevance today.

Since the US imports more than it exports, it has to exchange US dollars for goods. These dollars (physical or otherwise) are held in foreign reserves.

I read somewhere that there are more dollars outside of the US than inside, but I have not been able to see any official government information that would prove this true or false.

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