Inflation: When $5 Billion Can’t Buy Bread

Inflation: When $5 Billion Can't Buy Bread

$5 billion. Five billion dollars. $5,000,000,000.

The heartbreaking irony when I was holding this $5 billion bill was that it wasn’t even enough to buy a loaf of bread.

We were nervous going into Zimbabwe. We were only going to Victoria Falls, a tourist city located just 40km away from the western border between Namibia and Botswana. But it was the summer of 2008. There was bloody political violence over the elections in the spring of 2008. Thousands of Zimbabwean refugees had illegally crossed into South Africa to escape the political violence. I witnessed the refugee camps that sprung up in Cape Town. Things got violent in Johannesburg; Zimbabwean refugees were necklaced there. Our guide told us that we would be safe. We weren’t so sure.


 

Hyperinflation was rampant. Everyday, the cost of living was exponentially increasing. When we were in Zimbabwe in July 2008, $15 billion was the equivalent of one US dollar. Our guides told us just a month before that a few hundred million dollars was worth one US dollar. It was absolutely surreal.There was a shortage of goods and food across the country. What should have been a vibrant and energized tourist town was empty and desolate, like a ghost town. Grocery stores were empty. I remember looking down one aisle and only seeing 3 lonely ketchup bottles. A loaf of bread cost $75 billion.

We went to the local mall and ate at the food court. There was no one there but us and a handful of other tourists. We ate at Steers, a South African based burger franchise, with our group. Some people in our group found the situation funny. They joked about the multi-trillion dollar bill that was presented for our meals. They left their meals uneaten. They thought it was funny. We found it heartbreaking.

What is Inflation?

The only recollection I had about hyperinflation was learning about Germany’s hyperinflation in high school history. The image of German children playing with stacks of worthless money in that high school history textbook was moving, powerful, and lasting.

What does hyperinflation in Zimbabwe have to do with anything? I wanted to use an extreme example to demonstrate how inflation affects our everyday life. The Bank of Canada defines inflation as “a persistent rise over time in the average price of goods and services – in the cost of living.”

A persistent rise over time in the cost of living.

Now, we won’t go into the theory of inflation because it is a subject economists and academics devote their careers to. It’s rather complex and there is no easy answer as to why inflation occurs. If I were to try and hash out reasons for inflation, this blog could go on for the end of time debating and presenting the different ideas. So we will simply accept that there is a persistent rise over time in the cost of living.

The Problem with Inflation

Inflation means that the dollar you earned yesterday is not worth a full dollar today. It still visually looks like the same dollar, but the value of it has changed. It’s a hard concept to grasp because the money looks the same. If the money looks the same, how is it worth less than it visually states that it is worth?

Everyone is aware that prices on all sorts of goods and services increases over time. I know this because everyone loves to complain about how such and such cost less back in the day. Just like how I like to complain that a Coke from vending machines used to cost only a dollar 10 years ago in highschool, but now it costs two dollars. That’s inflation.

The Bank of Canada offers an inflation calculator that calculates the value of money today versus any year back to 1914.

Here is a graph demonstrating the eroding purchasing power of $1 from 1914 to 2014:

100 Year InflationWhat this graph demonstrates is that $1 in 1914 had the purchasing power of $20.52 today. The average annual rate of inflation over the past 100 years has been 3.09%. That might not seem like much but 3.09% year after year for a hundred years has eroded the purchasing power of the dollar significantly.

Let me show you a more recent example, from 2004 to 2014:

Past Decade Inflation

 

Again, do you notice a pattern? The purchasing power of $1 is constantly and consistently eroding. The rate of inflation over the past decade has averaged 1.77%. $1 in 2004 had the purchasing power of $1.19 today. This means that in 2004 you could have bought more with a $1 than you can today.

The Hidden Tax

It’s a tricky concept to wrap your mind around, but trust me, inflation exists and it eats away at the value of your hard earned money. It’s kind of like tax: a portion of your money is consistently and constantly being “taken” away from you. However, it is elusive, like a hidden tax.

While thinking about inflation, it hit me like a ton of bricks: saving and investing money intelligently and collecting a modest return is the only way to maintain and grow your money. You just can’t sock away your money in a piggy bank or underneath your mattress. Given enough time, inflation will seriously erode the purchasing power of your money.

Even low rate savings accounts are safe. If a savings account provided a 2% rate of return and the rate of inflation was 2% in a given year, the amount of money in your account increased but the purchasing power of your money stayed the same. Your money is worth exactly the same as it was worth a year ago even though the numerical number in the account has increased.

Conclusions

Inflation has led me to think that the fundamental reason for investing your money is to at minimum maintain the purchasing power of your wealth. It also emphasized for me how vitally important it is to grasp the concept of inflation.

Hyperinflation in Zimbabwe opened my eyes to the devastating effects of rampant inflation. While our inflation rates are nowhere near as dramatic as those Zimbabwe experienced, the poverty and the misery that follows inflation should be a stark reminder to always grow your money.

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9 thoughts on “Inflation: When $5 Billion Can’t Buy Bread

  1. Yeah, freakin’ crazy right? As a coin/currency collector I have a stack of bills from Zimbabwe with all types of millions and trillions on it. Very cool to have and think about, but not so much the reality of things – especially there 🙁 Great article on inflation though – you managed to make it actually interesting! Haha…

    1. Thanks J. Money! Man, inflation is one of my great fears. In my mind, everything is about combating inflation. I continuously tell my wife that our cash is worth less today than it was yesterday. Haha!

  2. Inflation is an effective mechanism to get rid of large personal debts. There’s no strong reason to fear hyperinflation in USA/UK (see http://coppolacomment.blogspot.co.uk for some good economic reasoning).

    However, that’s not to say *regular* inflation isn’t happening – it is. And it’s probably running higher than you think [hint: it’s closer to 6pc than 3pc]. Conventional cash in the bank/mattress won’t cut it or last – everyone has to take a stake in the global game.

    We’re all investors now, whether you wanted to be or not.

    1. Inflation definitely can help burn away debt pretty quickly – it’s how governments usually pay off huge amounts of debt. And it can work the same way for an individual with a mortgage – if they are locked into a mortgage at say 3% for a long time and inflation jumps to 10%, wages will increase and they will be able to pay off the debt quicker at low interest rates.

      However, most people are too afraid to invest in the markets and unfortunately end up leaving their money in savings and chequings accounts doing diddly squat. In this scenario, inflation is DEADLY!

  3. Bloody interesting article old bean.

    Inflation is a key concept to understand if you want to master PF but it’s quite easy to grasp in its basic mechanism, how this affects you and what you should do about it (especially with articles like this one explaining it so well!).

    Once you delve a little deeper into the economics of it it’s actually even more interesting I find! The major reason that inflation happens is simply dilution of the money supply, e.g. by printing money. As mister squirrel points out this is primarily so governments can erode huge debts more easily, but it also helps out individuals with mortgages and I assume businesses with large debts as well, as long as they stay solvent for long enough!

    There are loads of hyperinflation events from around the world and we heard a few crazy stories when in Bolivia and Argentina. A quick look at the map on the Wiki page you linked to is a stark reminder at how many countries are still having crazy inflation compared to our own (UK & US)!

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