On Jan. 16, the Sacramento Kings announced that they would become the first NBA franchise to accept bitcoins. Starting March 1, fans will be able to buy tickets and merchandise in exchange for the virtual currency. The team, stationed in the capital of California, is no stranger to using new technology within their business. One of their recent marketing strategies uses Google Glass to give fans the vantage point of their favorite player during a dunk or defensive set. They have also utilized the Google technology to assist the coaching staff during games.

However, if successful, their acceptance of bitcoin may have the biggest implications for the rest of league and the sports world.

Launched in 2009, bitcoin is a virtual currency that allows for direct transactions between consumers and merchants without the use of banks. It allows for an anonymous and untraceable purchase between two parties. Currently, there are three ways to acquire bitcoins: through a bitcoin virtual marketplace, mobile transfers and mining. In a bitcoin marketplace, users can purchase bitcoins in exchange for different currencies. The market price for one bitcoin on Feb. 28 was $572.05. The public also acquire bitcoins through mobile apps that allow for the transfer the currency. Lastly, people can acquire the currency by mining which involves using software to generate new bitcoins.

Like any business decision, accepting the bitcoin comes with gains and risks. The Kings’ ownership changed  a year ago to prevent the relocation of the franchise. With new management, the timing is perfect for the Kings to introduce new technology and practices within their business.

The Kings hope that the introduction of the bitcoin will make transactions more convenient for NBA fans. Utilizing bitcoin will make allow fans take advantage of the currency’s anonymous and unregulated transactions thus allowing them to leave their wallets at home. Bitcoins will also allow fans to purchase merchandise without waiting for the currency to be assessable. Unlike banks, bitcoin transactions do not have waiting periods around weekends or holidays. Therefore, transactions will be able to be processed during days that banks when banks are closed.

There are also several disadvantages to the accepting bitcoin. Bitcoin have been known to be volatile with constantly fluctuating exchange rates. If the value of the bitcoin were to plummet, the Kings franchise could be at risk to lose money. There are further risks regarding the inflation rates of bitcoin. The most recent December consumer price index stated that inflation was at 1.3 percent while bitcoin is at a 98 percent deflation rate. Essentially, the bitcoin currency is declining in value against the dollar. Furthermore, by nature of the currency, the rate of new bitcoin generation is slowing over time which is predicted to further deflate the value of bitcoins. Although these risks have not detoured proponents of the currency, West Virginia Senator Joe Manchin has been lobbying for a ban on bitcoins.

From comparing the potential gains with very real risks, bitcoin does not seem like a secure decision for the Kings. While intended to increase the ease of transactions, the average basketball fan will most likely continue to use cash, debit or credit cards. While, bitcoin’s recent rise in popularity makes the decision worthwhile, I believe that the venture will not be as successful as expected.

Ultimately, it is hard to believe that bitcoin will replace the current prominent forms of payment. Bitcoin does not offer additional transactional convenience except to the select few users of bitcoin. For the Kings, bitcoin seems to be a high-risk, low-reward decision considering the immense fluctuations in value. However, if the acceptance of bitcoins proves to generate greater revenues, the Kings will be commended as innovative early adopters in the NBA causing other teams to adopt similar policies.

 

From a tourist’s perspective, Argentina is a relatively relaxed country. From the wine bodegas in Mendoza to the languid city life in Buenos Aires, it is difficult to imagine the underlying resentment towards the government and the decline of their economy. However, once you have walked the sidewalks in the city or experienced enough rainy days to notice the crumbling infrastructure, the angry graffiti on the building walls, or the constantly changing prices on restaurant menus, today’s problems become apparent.

Inflation is not a new problem for Argentina. Historical inflation rates have hovered around the thousand percentages, but the government has always found a way to stabilize the economy. Argentina has encountered quite a few inflationary cycles in their economy, each which led to new policy controls that aided in the short run, but did not provide long-term anti-inflationary effects. Other changes took effect in the 1990s, from liberalization and deregulation of all of their markets to a new tax system. With less government regulation, prices began to stabilize according to the market, and the public had the option to use any type of currency they pleased. Inflation stabilized to an average of 0 percent by the 1990s, with the inflation rate fluctuating with the economy.

These new policies worked until the end of the 1990s. Poorly planned liberalization strategies, where the government sold sectors of their economy for less than half their value, led to worse working conditions and thousands of layoffs. 2001 saw one of the most turbulent times of Argentina as protests mounted to an all time high in the Argentizo which ousted President de la Rue and had the government fumbling through 3 other presidents before Kirchner stepped into power. The economy managed to pick up around 2003, but the economy has rapidly been declining since.

Argentina’s inflation today is at a ten-year high of 30% and the government’s expansionary monetary policy may be to blame. Government subsidies, such as holding household electricity costs constant (though they are still expensive), after the 2002 crisis have caused a need to print more pesos to finance these projects. By injecting so many extra pesos into the economy, the value of the peso decreased. Investors withdrew their money from Argentina due to uncertainty about Kirchner’s policies and fear of inflation. In order to prevent this capital flight, beyond the $21.5 billion capital flight happening in 2011, President Cristina Kirchner banned citizens from withdrawing US dollars from the bank. She has also tried to limit imports, vacations, and online purchases (Porsecanski 2014). Former finance Secretary Daniel Marx explained, “Those problems are related to the speed of inflation and the exchange rate in an international context that is more complicated” (2011). Argentina’s Mercado Abierto Electronico system estimated that these policies have diminished the amount of currency officially traded by 50%, as compared to 2010. These bans have only allowed the black market exchange for US dollars to flourish.

The government’s attempt to curb and hide inflation in the country has become apparent with the differing values of the official peso and the “dolár blue,” the black market exchange rate for the peso. The “dolár blue” rate reflects how much the citizens think the peso is worth, it is based on the economy and “Wall Street.” This also highlights the effects of the government’s attempt to decrease the supply of US dollars in the market (which increases the value of the dollar). In the span of one month (January to February 2014), the official rate had changed from around 6.5 pesos per US dollar to 8 pesos, a 23% decrease in the value of the peso. The “dolár blue” has jumped from 10 pesos per US dollar to 12 pesos, a reduction of 20%. Local newspapers have speculated on the apparently more stable value of the “dolár blue”, which demonstrates the ineffectiveness of government policies versus market forces in Argentina. 

The increase of government intervention in economic policies has led to their economic decline, with a bill approved that allowed the government unlimited access to the central bank’s reserves. This granted the government the ability to print money as needed for their endeavors, contributing to the country’s inflation. Kirchner has also seized private industries, such as the oil company YPF, in order to stabilize oil prices for citizens. This has only led to unnecessary increased government expenditures. The government has attempted to diminish their restrictions, by allowing individuals (but not businesses) to withdraw US dollars from the bank. Nicolás Titaro, a company treasurer in Buenos Aires explains, “Great, we can buy dollars now…We just need salaries that let us.” The government’s poor timing with their policies has only increased the ineffectiveness of their macroeconomic strategies.

Fears of inflation have reverberated throughout the economy, from the value of their pesos to some of their most important exports. For instance, in the agricultural sector, farmers have been refusing to sell their soybeans. They understand that their soybeans have a more stable value than the pesos they could receive for selling the soybeans. The US Department of Agriculture explains, “Unless a mechanism becomes available for producers to convert soybeans into assets that can retain their value in the current inflationary environment, limited selling is likely to continue.” This could become a problem, as Argentina is one of the world’s top soybean exporters and soybeans are one of Argentina’s main crops.

Stagflation could be the end result for Argentina unless the government can finally admit to the actual value of their dollar. There needs to be more responsible government actions, privatization–but in a socially conscious manner. Free market forces can do wonders for the economy, but also harm minimum-wage workers. The government needs to allow market forces to dictate the economy, while ensuring the protection of the lowest rung of workers.

The continuation of the decline of the peso can only mean an even smaller dollar reserve and decreased leeway for the government to pay back international debts and enact new policies. In the long-run, Argentinians can expect a lower standard of living as price increases diminish their purchasing power. The lack of transparency from the government will only lead to increased demand for US dollars and rapid devaluation of the peso, as no one, not investors nor porteños have faith in the Argentinian peso.

Since the dawn of the 21st century, the hyperinflationary measures of the Zimbabwean dollar (ZWD) have plagued the economic progress of the nation.

When Rhodesia gained sovereignty from Britain on April 18, 1980, the former colony became known as Zimbabwe and proceeded to replace the Rhodesian dollar with the ZWD. At its peak, 
the ZWD was once worth 1.59 United States dollars (USD) but experienced sharp declines after land reforms in the early 1990s contributed to the currency’s hyperinflation, causing it to become extremely devalued. These land reforms that arose under President Robert Mugabe’s policies caused inexperienced black farmers to gain land from more experienced white farmers, resulting in plunging of Zimbabwean agricultural productivity and the ZWD. In order to compensate the lack of food production and revenues, the Zimbabwean government continued to print money.

According to Former Zimbabwean Foreign Affairs Minister Jafari Banda, estranged from the Zimbabwean government after a failed assassination attempt on Mugabe, “What happened in Zimbabwe is that production stopped. An endless cycle of corruption brought a cease in production. We were not producing anything. The corruption led to a disruption in the industrial and agricultural infrastructure, which are the backbone of the economic sector. We weren’t producing, we weren’t mining, no industry, no commerce, no farming.”

With these land reforms continuing well into the 21st century, the country experienced spiraling hyperinflationary rates. By 2004, the rate of inflation was 624%. In a desperate attempt to fix the currency value, the Zimbabwean government revalued the currency from 1000 ZWDs to 1 ZWD. This was highly unsuccessful in stopping the monstrous inflation, however, as the ZWD continued in the established pattern of hyperinflation, reaching 1,730% in 2006. Dr. Gideon Gono, the governor of the Reserve Bank of Zimbabwe, announced the currency had to be printed in order to buy foreign currency to pay overdue payments to the International Monetary Fund. In addition, currency had to be printed to account for the rise in salaries for civil servants, including soldiers and policemen.

The Zimbabwean government could barely print enough currency to match the hyperinflation, so it requested citizens to add 0 digits at the end of existing currencies’ value. On the day of introduction of the 100 billion dollar bill (~1 USD) in July 2008, the amount was able to purchase a measly three eggs at the average local market. In its latest figure, Zimbabwe had reached inflation rates of almost 516 quintillion percent with a monthly rate of 79.6 billion percent or a daily rate of 98%. The greatest cause of this new surge in hyperinflation is the ongoing cholera outbreak that decimated the country starting August 2008, resulting in even greater food shortages. This correlated to a doubling of prices almost every 24.7 hours, akin to the hyperinflation of post Second World War Hungary. The ZWD reached such inflated rates that 100 trillion dollar bills eventually came into production in January 2009. These bills themselves could hardly purchase any goods in the market.

By this point, Zimbabwean traders completely abandoned the ZWD, adopting the more stable US dollar or South African rand (ZAR) instead. The Zimbabwean government legalized the use of these new bills in February 2009, while it tried to revalue the currency. The government was able to bring the value of its currency to more manageable face value, reducing the once $1,000,000,000,000 bill to $1 in February 2009. The new currency was almost completely irrelevant as most of the citizens in Zimbabwe refused to use it. The government officially ceased production of the ZWD in April 2009 and does not plan on reintroducing it again until 2010.

According to Economics Professor James Feyrer at Dartmouth College, “My understanding is that the dollar (and other “hard” currencies like the Euro) were acting as defacto currencies long before they finally abandoned the Zimbabwean dollar. If you were exporting to Zimbabwe you had no interest in taking the Zimbabwean dollar as payment. The dollarization formalizes this and should increase the volume of trade. For Zimbabwe they get to use a currency that has low inflation and high international credibility. The US actually benefits because there is seigniorage on the dollars being used in Zimbabwe. This is a very small amount since the Zimbabwe economy is so small relative the US economy.”

About the effect of dollarization on the economies of countries involved, Banda had to say, “It leads to distortions because the price of commodities is regulated by supply and demand, which varies from country to country. The effect is perhaps negligible depending on the size of the ‘parasite’ economy and commerce. The intent behind dollarization is to generate foreign currency in order to participate in foreign trade. But if it is the ZAR, the use of it Zimbabwe would greatly negate its strength and stability. In comparison, the Zimbabwe Reserve Bank at peak would hold 5 million USD to support the entire economy whereas 5 million USD isn’t even operational for a Bank of America branch.

For a while, Mugabe and his Zimbabwe African Nation Union – Patriotic Front (ZANU-PF) denied their policies as the major cause of Zimbabwean hyperinflation, blaming international sanctions by the US, EU and Australia on politicians and businessmen loyal to the Zimbabwean government. However, with opposition running high, Mugabe’s administration apologized numerous times and attempted to fix the crisis. Mugabe eventually succumbed to popular demands for him to share power with opposition party leader Morgan Tsvangirai of the Movement for Democratic Change – Tsvangirai (MDC- T) party. Tsvangirai was officially sworn in as Prime Minister on February 11, 2009.

Professor Feyrer also notes, “If
 Zimbabwe intends to reintroduce a domestic currency the only way to regain the public trust is to credibly promise to make the new currency stable. One way to do this is to peg the currency to a stable currency or have a currency board where there is 1:1 backing of the new currency with the dollar or other stable currency. Pegs can be broken, however, and it may take time to regain the trust of the public.”

About the dynamics of the economy, Banda had to say, “Zimbabwe needs to restart production. Get the industries running and farm the lands you seized. All will be futile unless there is a conducive political atmosphere in order to encourage foreign investors to invest and operate businesses that would restart commerce, industry, and farming.”

The currency issue brings up many important consequences for the future of Zimbabwe. Now that Zimbabweans removed the ZWD from use in their daily lives, how will it affect the stability of the Zimbabwean economy? How will international trade operate under this new system of dollarization? With the new combined party coalition ruling, will Zimbabwe be able to surmount the overwhelming economic pressures? Will the ZWD ever gain the trust of the people and come back into popular use? While economists are still gathering data on these economic implications, we can all hope that in the meantime Zimbabwe will be able to forge a new future.

 

 

Zimbabwe 100 Trillion

The International Monetary Fund estimated that by January, Zimbabwe’s inflation rate had escalated to 150,000%. The Zimbabwean government has refused to release inflation figures in an effort to keep prices down since last June. That plan has failed as businesses have used inflation estimates to set prices.

The Zimbabwe Reserve Bank decided to increase the money supply to ease the cash crisis. Yet this will only worsen the problem. The Reserve Bank is considering issuing a new currency of a lower denomination. However, if Zimbabwe is unable to implement monetary reform along with the new currency, inflation will continue to spiral out of control.

Zimbabwe’s raging hyperinflation is a result
of a lack of revenue to cover expenditures.
The Zimbabwean government has been
unable to reduce spending, subsequently
racking up a very large fiscal deficit. A
government can finance its spending in three ways: by taxing the public, selling government bonds, or printing money.

Due to existing economic woes in Zimbabwe, it is not feasible for the government to raise more revenue by increasing taxes. Zimbabwe already has one of the highest tax rates in the world, as the average citizen is subjected to a 35% income tax. However, despite these high taxes, the Zimbabwean government provides very few social benefits for its people. Many people in Zimbabwe barely have enough money to afford basic necessities like transportation, food and rent, let alone fund their government’s fiscal expansionary policies.

Zimbabwe is unable to raise revenue through the sale of government bonds because there is no public demand for them, stemming from a lack of faith in the Zimbabwean government.

Contrarily, every year the U.S. government raises billions of dollars of revenue by selling bonds and securities to the public. The U.S. has established a reputation as a creditworthy institution, and has never defaulted on its debt obligations. Zimbabwe on the other hand, has been plagued with political unrest and financial insecurity. Investors are unwilling to risk their money in a precarious political environment in order to finance a government with questionable credit history. The Zimbabwean government is handicapped by their inability to raise revenue by issuing debt.

Unable to levy taxes or sell bonds, the Reserve Bank has resorted to printing money as a solution to their fiscal woes. The inflation rate has drastically increased from 3,700% in April of 2007 to 66,000% in December of 2007 to 150,000% in January of 2008. Zimbabwe used to be one of Africa’s most prosperous nations, however, poor monetary policy has destroyed the economy and unleashed hyperinflation.

The central bank’s loosening of monetary policy not only finances the fiscal and trade deficits, but also targets Zimbabwe’s past decade of negative GDP growth. In 2000, Zimbabwe’s president, Robert Mugabe, enacted land reform that severely hurt the country’s maize productions. The production of this staple crop, dropped by as much as 75% as a result of the reforms. This had a strong negative impact on rural incomes, exports, and food securities. Unemployment reached 80%, manufacturing fell 51% from 1997 to 2005, and exports declined by a half from 2001 to 2005. As a result, aggregate demand and the economy’s total output decreased significantly. The Reserve Bank’s policy theoretically could shift aggregate demand back to long run output. However, increasing money supply has only resulted in hyperinflation and an exacerbation of the Zimbabwe’s economic recession.

Historically, countries that have suffered from hyperinflation have resolved the problem by restoring faith in their currency and by enacting strict monetary reform. Zimbabwe must end its economic misrule by beginning to deal with its hyperinflation.