Copyright 2012 by John T. Reed

Zambia is in Africa. You know Africa, the continent that regularly vies with Latin America for the Most Perennially Dysfunctional Continent Award. Argentina’s former Marxist president made a strong bid for the award with her talking about the Falkland Islands really belonging to Argentina again. But Africa will probably win this year with Zambia’s new “Use a dollar; go to prison” law.

These are capital controls. Readers of this web site know them. Your government wants to hyperinflate because they can’t sell bonds anymore. But to hyperinflate, they have to force everyone use their national currency—the kwacha in Zambia. How do you do that? The old tried-and-true ways: legal tender laws and capital controls.

So they now have legal tender laws and capital controls in Zambia. People there have been using the U.S. dollar because the kwacha sucks. Now using the U.S. dollar is illegal. You can get up to ten years in prison for “quoting, paying or demanding to be paid or receiving foreign currency.”

Enjoy the humor in this while you can because I expect that within about five years, we will have a similar law in the U.S., ironically saying the opposite: “Use anything other than the U.S. dollar, go to jail.”

People refuse to use their own country’s currency because they do not trust it. Today, in Latin America, when someone buys a house, they pay all cash and not local cash. They pay in U.S. dollars.

Can’t do that in Zambia anymore. So if you are not interested in selling your $100,000 house in Zambia for 476 million kwacha, you’d better just take it off the market and wait for the next military coup.

The Journal tells of a recent, now-illegal, routine transaction. Zambia tenant carries a backpack full of 38.08 million kwacha to the bank (about $8,000 U.S.—a year’s rent in advance) to pay a year’s rent up front to her landlord, a Ghanaian. The Zambian tenant had to use the 38 million kwacha to buy approximately 5,100 British pounds which the Zambian bank wired to the London bank account of the Ghanaian landlord.

I hope you were taking notes. This is your future—if you are as smart as a Ghanaian landlord. First, landlords in countries with squirrely currencies demand a year’s rent in advance, not just a month. Second, they do not state the rent in local currency. They state it in a stable foreign currency like the British pound. Third, they get the money wired to them in the country of the stable currency, in this case to a London bank. Those are exactly the sort of things you should do as long as you are allowed to. What do you do after they stop letting you use stable foreign currency? Charge the rent allowed by the rent control board until it is no longer enough to compensate you fairly for your time and risk, then walk away from the building and move to London or some other reasonably well-run country. Probably should have done that before you bought the building. What were you thinking?

Now that I own Australian, Canadian, and New Zealand dollars and Swiss francs, I check the Wall Street Journal’s “Currencies” box every day. What was the kwacha-dollar exchange rate today? The kwacha is not one of the 47 foreign currencies listed. Fundamentally, these sorts of laws in such countries—it saw the same in Germany, Austria, Latin America—require that you A. starve or B. go to prison. I recommend C., get you and your life savings the hell outta there before all this quite foreseeable stuff hits the fan.

John T. Reed