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Doctor Evil Would Be Proud
With an official inflation rate of 2,200,000% (2.2 million percent), Zimbabwe's central bank has now introduced the $100 billion dollar bill. I can just hear Mike Myers as Dr. Evil shouting "One Hundred Billion Dollars!" Unfortunately, Zimbabwe has its own, real life version of Dr. Evil, as we will see in a minute. Inflation is so high in Zimbabwe that the supply of money just can't keep up with the cost of goods. For example, while it may sound appealing to have a net worth of $100 billion dollars, in Zimbabwe this amount is not enough to purchase a single loaf of bread! The new Zimbabwe $100 billion dollar bill is roughly equal in value to one U.S. dollar.
The Zimbabwean central bank, the Reserve Bank of Zimbabwe (RBZ), has mismanaged this hyper-inflation and has ignored advice from the International Monetary fund (IMF), instead choosing to print money as if it were toilet tissue (which went for $417 per sheet, not per roll, in March of 2006, according to a New York Times article). As more money is added to the supply, the value of each individual unit of currency falls, until the currency becomes worthless. Sound familiar? This is happening right now on a much smaller scale in the U.S., leading former Presidential candidate Steve Forbes to refer to current U.S. monetary policy as "Zimbabwe economics".
What is the solution? Well, inflation can be caused by too much money chasing too few goods, and one possible solution would be to increase the number and amount of goods produced. The other, more obvious solution would be to decrease (or at least stabilize) the supply of money. Unfortunately, this is easier said than done. This is especially true when your leader is President Robert Mugabe, who has ruled the country for 28 years and was recently condemned by the international community for waging a campaign of violence against his political opponents. Mugabe's main opponent, opposition leader Morgan Tsvangirai, withdrew from last month's election after alleging his supporters were being targeted in a state-sponsored campaign of violence. Mugabe is now threatening to loot businesses owned by foreigners, especially from the U.K., blaming them for his country's economic woes.
The Mugabe regime's economic mismanagement has already led to a 10-year recession (source: International Monetary Fund) and an unemployment rate of nearly 80%, and will undoubtedly cause more pain and suffering to millions of Zimbabweans for years to come. A just-published study by Long Island University researchers measuring economic opportunity and quality of life in over 100 countries shows Zimbabwe coming in dead last. Iceland was number one, Canada was second, and the U.S. came in 11th. For the full list and an explanation of the criteria, please visit:
http://www.cwpost.liu.edu/cwis/cwp/pr/press/2008/117.html
And to those among my fellow Americans who smugly believe that it can't happen here? Well, it can – in fact, it already has happened here. Continental currency was a paper currency issued by the Continental Congress, after the Revolutionary War began in 1775. With no solid backing and being easily counterfeited via printing press, the continentals quickly lost their value, giving voice to the phrase "not worth a continental". It was eventually replaced by the silver dollar at the rate of 1 silver dollar per 1000 continental dollars. Finally, in 1792, the Mint Act was passed, and the dollar was pegged to silver and gold, putting an end to this nonsense for good.
Or so it seemed. The so-called "gold standard" effectively came to an end in 1933 when President Franklin D. Roosevelt outlawed the private ownership of gold. Without a gold standard, governments can print as much money as they want, destroying wealth through inflation. Here is a great quote from a man who was, at least at one time, clearly in favor of a gold standard:
"Under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth... The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation."
Alan Greenspan, 1966
Any enormous increase in prices threatens to impoverish the agricultural and working class of that country. Because inflation wreaks such havoc on the quality of life in any given country, major central banks like the ECB (European Central Bank) have made the containment of rising prices their primary mission. Federal Reserve Chairman Ben Bernanke said last week that U.S. inflation "is too high" and reiterated that the Fed's aim is to achieve price stability, but so far it's been all talk and no action. Only time will tell if we will see some serious movement on this front.
Question of the Week
Q) Ed, I've been practicing intraday Forex trades in a demo account and I've been using the 8 and 13 period simple moving averages as my trend line, and mostly using a 1-hour chart. My understanding about trends is that they get exhausted and the best time to get in is when trend lines (in my case, the moving average) are broken and prices start to move in the other direction. This is also in line with the concept of buying near support and selling near resistance. However, I've had very little success with this technique. When reviewing my failed trades, more often than not, the prices kept moving in the direction of the moving average and the counter-moves were merely pullbacks and not reversals. Therefore, the saying "The trend is your friend" must have some validity after all. If so, when doing an intraday trade, which time frames trend line should I trust (hourly? daily? 15-minute?)? Or should I even pay attention to the trends and just use support and resistance instead? What do you recommend?
Ed Ponsi) Thank you for your question. There is a common misconception in trading that if a trend line or moving average breaks, it is a signal that a new trend in the opposite direction has begun. While that is true some of the time, what you have learned is that more often than not, the trend is just pausing before resuming its prior trajectory. In general, trend lines tend to be more reliable on long term charts, such as the daily or weekly chart.
Instead of using these pauses in the trend as counter-trend entries, in which the trader is essentially betting on a reversal, why not think of them as an opportunity to trade in the direction of the overall trend? For example, the next time you see a pull back within an uptrend, look for support to enter a trade that goes in the direction of the prior trend. I think you're going to find that the trend really is your friend, and you just happen to be trading the best trending market in the world. Good luck!
Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.
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Ed Ponsi is a globally recognized name as a lecturer and teacher and is the former Chief Trading Instructor for Forex Capital Markets. An experienced professional trader and money manager, Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. Ed has appeared on CNBC, CNN International and TheStreet.com, and has recently written his first book for Wiley Finance, "Forex Patterns and Probabilities" (which you can purchase through