Money isn’t everything. We provide additional proof this morning by looking at a place with a lot of money – Zimbabwe. Nowhere on the entire planet is money piling up at a more rapid pace. The printing presses in that hellhole must be working around the clock. Consumer price inflation is increasing at an annual rate of 1,729%!
“My bad,” says Robert Mugabe, the nation’s democratically elected tyrant.
We look to Zimbabwe not merely for entertainment but for instruction. It shows us that not only is money not a good gauge of wealth and happiness, neither are asset prices. Rich Americans look at rising stock prices. ‘All is well,’ they say. ‘We’re getting wealthier.’ Poor and middle class Americans look at their house prices. ‘All is well,’ they say. ‘Our houses are worth twice as much as they were 5 years ago; we’re getting wealthier.’
Alas, it is not so. As money comes off the presses in Zimbabwe, it has to go somewhere. More of it goes to the rich than to the poor. So, ASSET PRICES RISE MORE THAN CONSUMER PRICES. Guess which stock market has gone up the most in 2007? The Zimbabwe stock market! It’s up 600% so far this year…up 12,000% over the last 12 months.
Imagine that you live in Zimbabwe. You are one of Robert Mugabe’s cronies and you get your hands on US$50,000. Of course, the first thing you want to do is to shuffle it out of the country. But short of that, what do you do? Do you invest in real capital improvements…new industries…new equipment…new property? No chance. Not in an economy that is rapidly collapsing. People don’t have enough to eat. They can’t buy fuel.
Public services are crumbling. Transport, education, health, trash collection, police – they are all disintegrating. It used to be the richest part of Africa. Now, thousands of refugees sneak out of Zimbabwe every week. The place is a disaster.
Instead of investing in fixed capital improvements, you put your money into stocks – hoping that the stocks will go up faster than your currency goes down. The result? A speculative, asset-price boom – even while the whole country is falling apart.
Meanwhile, America has its own asset-price boom…its own crony capitalists…its own printing presses…
But even as asset prices go up, the real economy slows down. Today’s news tells us that the GDP is barely growing at all. And the Fed says housing will be a drag for longer than expected.
Markets and Money