Friday, July 31, 2009

A $200 Million Tip?

Will the Fed raise interest rates anytime soon? Not likely, unless inflation rears its ugly head.

But nobody is expecting much inflation over the next year so. That’s why short-term interest rates are close to zero. And even if inflation does become an issue, we’re lucky—compared to Zimbabwe, that is.

I ran across this image on the web. It’s a receipt, evidently for a meal about 18 months ago, from the Victoria. Total before gratuity? About 1.2 billion Zimbabwe dollars, or about $ 18 US at the time.

Now that’s inflation! Not because there’s barely room on the receipt for the numbers, but because that same $18 meal would only have set you back only a few million Zimbabwe dollars just six months earlier.

Are your US dollars still strong in Zimbabwe? While the current exchange rate makes it seem as if the situation has improved, it really hasn’t. Today $18 US is the equivalent of about 5,800 Zimbabwean dollars.

However, Zimbabwe has made some changes to its currency—kind of like a reverse stock split. About a year ago, they lopped off 10 zeros from the dollar, and about six months later they took off another 12 zeros.

That means $18 US is really now the equivalent of 58,000,000,000,000,000,000,000,000 Zimbabwe dollars back when that original receipt was printed. That’s 58 septillion!

Outside of the issues with printing currency large enough to hold those numbers, I’m assuming Zimbabwean companies face serious marketing challenges in this environment.

Think about it—the minute you issue some coupons advertising a billion dollars off your next oil change, you have to issue more coupons to sweeten the offer to a trillion.

I don’t think there are any McDonald’s in Zimbabwe, but you wouldn’t be able to have a “dollar menu.” It would have to be the “billion menu” (or “trillion menu,” who knows?)

And even just leaving a tip becomes a nightmare. Think quickly! How much do you tip on a bill of $1.2 billion? (I’d probably leave at least $200 million—maybe $100 million more if the service was excellent. )

Hint to central banks: When restaurants start needing to use exponential notation to give someone a dinner check, it’s time for a serious review your monetary and fiscal policies.

Posted by Richard Bloch

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