Hyperinflation

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Presentation is based on what is hyperinflation and its example(s).

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Hyperinflation

  1. 1. Hyperinflation and examples Its causes, current situation and possible solutions
  2. 2. Contents 1. 2. 3. 4. What is Hyperinflation? What are the causes of Hyperinflation? Case study on Zimbabwe. Measures suggested to overcome Hyperinflation.
  3. 3. What is Hyperinflation?
  4. 4. What is Hyperinflation? In economics, hyperinflation occurs when a country experiences very high, accelerating, and perceptibly "unstoppable" rates consequence. of inflation. Two things happen as a The term “Hyperinflation” is generally used when monthly inflation rates rise more than 50% and is supposed to end when the same goes below 50% and remains that way for at least an year.
  5. 5. What is Hyperinflation?(1) 1. General price level of goods and services increase, meaning currency loses its real value. 2. The real values of economic items generally stay the same, as measured by foreign currencies.
  6. 6. Money supply and Price level
  7. 7. What causes Hyperinflation? Hyperinflation is often associated with wars, their aftermath, sociopolitical upheavals, or other crises that make it difficult for the government to tax the population. So, the government starts printing more money to finance its expenditures and thus pumps money into the economy.
  8. 8. Effects of Hyperinflation People have more money to spend Prices of goods go up Currency devaluates People obtain less products for more money
  9. 9. Hyperinflation in Zimbabwe
  10. 10. Hyperinflation in Zimbabwe(1) Inflation Rate Inflation Rate 70000% 60000% 50000% 40000% 30000% 20000% 10000% 0%
  11. 11. Impact on Zimbabwe’s Economy You have to spare a measly Zim$50 Billion to buy an egg They even have a 100 trillion Zim$ note! And with ONLY two truck loads of money you could pay your restaurant bill!
  12. 12. Underlying Reasons The three main causes of hyperinflation in Zimbabwe are as follows: 1. Controversial Government land reforms 2. Drought 3. HIV/AIDS
  13. 13. Land Reforms The prime contributor to Hyperinflation The farm sector supplied about 60 percent of the inputs to the manufacturing base—so agriculture was truly the backbone of the economy. Due to colonialism 4500 White Families owned most of the commercial farms Excellent productive capacity Well-irrigated
  14. 14. Land Reforms The prime contributor to Hyperinflation(1) 840,000 black farmers were deprived of farming land and their potential employment opportunities.
  15. 15. Land Reforms The prime contributor to Hyperinflation(1) Commercial Farms Communal firms Had secure property titles that gave farmers large incentives to efficiently manage the land without property titles allowed a banking sector to loan funds for machinery, irrigation etc. Banks were reluctant to provide loans
  16. 16. Land Reforms The prime contributor to Hyperinflation Then president Mugabe decided on Land This essentially caused, 1. Seizure of commercial farms from 4500 white families 2. Redistribution of these farms amongst black farmers Reforms
  17. 17. Land Reforms The prime contributor to Hyperinflation Then president Mugabe decided on Land Reforms In practice, however, Most plots ended up in the hands of Mugabe’s political supporters and government officials, whose knowledge of farming was meager.
  18. 18. Land Reforms During the next 4 Years Due to lack of expertise the black people were clueless as to what to do with the commercial firms Economy began to shrink Price of goods went up Government started printing money to be able to afford goods in spite of increasing prices INFLATION SOARED
  19. 19. Adaptations in Zimbabwe • Declaring inflation illegal: The government declared inflation illegal. Anyone who raised the prices for goods and services was subject to arrest. This amounted to a price freeze, which is usually ineffective in halting inflation. • Use of foreign Currencies: Central Bank of Zimbabwe licensed around 1,000 shops to deal in foreign currency. Citizens had increasingly been using foreign currency in daily exchanges, as local shops stated fewer prices in Zimbabwe dollars because they needed foreign currency to import foreign goods.
  20. 20. Adaptations in Zimbabwe(1) • Black Marketing: Markets serving out of the law, rose as an alternative to flying to another country for buying daily goods. • Redenomination: The government did not attempt to fight inflation with fiscal and monetary policy. In 2006, before hyperinflation reached its peak, the bank announced it would print larger bills to buy foreign currencies.
  21. 21. Possible Solutions Dollarization Freezing government spending Stop printing currency Increase Taxes
  22. 22. Dollarization Occurs when the inhabitants of a country use foreign currency in parallel to or instead of the domestic currency as a store of value, unit of account, and/or medium of exchange within the domestic economy. This is effective because the real value of non-monetary items does not decrease, what decreases is the value of the currency with which those commodities are bought.
  23. 23. Freezing Government Spending The central bank printed money to facilitate government spending If government decreases its spending There is no need for central bank to print any more money Inflation would decrease
  24. 24. Stop Printing Currency Printing less money would ensure Less money circulates the economy Price of goods and services go down Eventually, Inflation would decrease
  25. 25. Solutions • The most direct solution is a credible promise to stop printing unlimited amounts of money. However, Zimbabwean inflation has lasted for five years and the credibility of any promise is problematic. • Alternatively, the government could declare some foreign currency to be the nation's official currency.
  26. 26. Solutions(1) • Short of abandoning the Zimbabwean dollar, Zimbabwe could enact a strict monetary policy. For example, the government would allow the exchange rate to float for a period of perhaps 30 days, so that the market would decide its true value, then declare a fixed exchange rate with the rand and declare the rand a currency simultaneous with the Zimbabwean dollar
  27. 27. References

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