Conceptual Relevance of Hyperinflation - Essay Example

Hyperinflation Tables of Contents Conceptual Relevance of Hyperinflation 3 Hyperinflation Causes and Cures 3 Hyperinflation in Zimbabwe 5 References 9 Conceptual Relevance of Hyperinflation The term ‘hyperinflation’ denotes large and rapid increment in the price level. Basically, no formal definition is present to delineate the term but it can be articulated in terms of multiples instead of percentages. Few instances of the hyperinflation can be demonstrated as follows: Table 1: Examples of Hyperinflation Year Country Hyperinflation (%) 1985 Bolivia >10,000 1989 Argentina 3,100 1990 Peru 7,500 1993 Ukraine 5,000 (Mac OS, “Hyperinflation”). “The Monetary Dynamics of Hyperinflation” authored by Cangan in 1956 is regarded as one of the earliest serious studies on hyperinflation and its impact. In this study, he denoted hyper inflation as the minimum 50% monthly inflation rate (Cangan, “The Monetary Dynamics of Hyperinflation”). Hyperinflation Causes and Cures There is great debate regarding the growth of money supply as the cause of the inflation. According to the large section of the economists, there is a strong correlation between the inflation and growth in the money supply. In that case, hyperinflation can be considered as the ultimate case of the money supply growth over the intensification in the production of the domestic goods and services. The reason behind the excess growth of money supply is relatively higher spending of money by the government in comparison to the collection of the taxes and charges. It further leads to the printing of more money to bridge the gap between the expenditures and the revenues. This excess creation of the money by the government is the root of increment of the demand in the economy which directly enhances the price level. Besides that surplus money supply can generate demand for the imported products instead of having a constraint in the foreign currency supply. Eventually it results in depreciating the local currency (Web Archieve, “Hyperinflation: Causes, Cures”). It has already been discussed that the paper is focused on the economy of Zimbabwe. Therefore, an in-depth analysis of the cause of hyperinflation in the nation and its effect will be demonstrated in the paper, but prior to that the global history of hyperinflation is exhibited below in a tabular format. Table 2: Worst Hyperinflation Rate across the World Country Name Month with Highest Inflation Rate Daily Inflation Rate (%) Time Required for Prices to Double Hungary July, 1946 207 15 hours Zimbabwe November, 2008 98 24.7 hours Yugoslavia January, 1994 64.6 1.4 days Greece October, 1944 17.9 4.3 days Taiwan May, 1949 11 6.7 days (Hanke & Kowk, 2009). In the above exhibited table the worst hyperinflations in the countries has been exhibited. Simultaneously, it also demonstrated a comparative analysis of the chosen country and the other countries in the world. Hyperinflation in Zimbabwe Zimbabwe experienced hyperinflation for the first time in the 21st century. In this paper, it has been intended to produce the reliable record of the hyperinflation in Zimbabwe, which has been considered as the second highest inflation in the world history and one of the worst economic conditions in the world. Zimbabwe contravened the hyperinflation benchmark first in March 2007. From the historical data, it has been found that after the fall of inflation rate beneath 50% threshold in the month of July, August and September in 2007, the rate of inflation has again soared at an astonishing monthly rate of 79.6 billion % in the middle of November in 2008. At that point of time, people refused to use Zimbabwe dollar and that brought the hyperinflation to an abrupt halt (Hanke & Kwok, “On the Measurement of Zimbabwe’s Hyperinflation”). Basically the hyperinflation of the country began in the initial stage of the year 2000, immediately after the elimination of the white-owned farmland of Zimbabwe and its disclaimer of the debts to IMF. According to the statistics, estimated annual inflation rate of the nation in November 2008 was 89.7 sextillion (1021) % (Hanke, S. H., “New Hyperinflation Index (HHIZ) Puts Zimbabwe Inflation at 89.7 Sextillion Percent”). Zimbabwe has abandoned the making of the national currency and US dollar and the South African Rand became the standard currencies for exchange. Even the government did not take any initiative to re-introduce the medium of exchange until 2010. The scenarios of the past two years of 2008 in Zimbabwe need to be analyzed for better understanding of the issue. In early 2006, Reserve Bank of Zimbabwe’s (RBZ) Governor announced that government was going to print ZWD 21 trillion to buy the foreign currency with an intension to pay off the IMF arrears. In early 2006, Zimbabwe government had started producing 60 trillion Zimbabwean Dollars. The requirement of the additional ZWD 39 trillion was to meet the 300% increment in the salaries of policeman and soldiers and 200% increment for other civil servants (Makochekanwa, “A Dynamic Enquiry into the Causes of Hyperinflation in Zimbabwe”). It was an unplanned decision as the government did not budget the money for the current fiscal year and they did not specify any source for accumulating the money. In August 2006, the government came up with new currency and requested the citizens to turn in old notes. According to the financial analyst, the new currency was not able to provide relief from the inflation. In February, 2007, RBZ announced the inflation as illegal and prohibited all kinds of hike in prices from March 2007 to June 2007 time frame. Even few executives of the Zimbabwean companies had been arrested for increasing the price of their products. After experiencing a sharp growth in the inflation rates, the government had decided to circulate Z$200,000 note and it had been reported that extreme shortages of the fuel, basic foodstuffs and medical supplies would have been proliferated. Government has also taken a measure of freezing the six-month wages. The year 2008 proved to be one of the worst years of the economy of Zimbabwe and finally at the early 2009, Zimbabwe government had again announced for publishing $50,000,000,000 note. On 12th April of the year 2009, the Zimbabwean dollar had been suspended. It has been also decided that all trades would be made in foreign currency. Somehow this initiative permits normal trading and it can be assumed that it will lead to the recovery of the economic condition of the country (Hanke & Kwok, “On the Measurement of Zimbabwe’s Hyperinflation”). Table 3, has exhibited the hyperinflation rate of Zimbabwe. It considers a time frame of March, 2007 to November 2008 to highlight the rapid increments in the inflation rates during this short period of time. Table 3: Hyperinflation in Zimbabwe (Hanke & Kwok, “On the Measurement of Zimbabwe’s Hyperinflation”). References Cagan, P., The Monetary Dynamics of Hyperinflation University of Chicago Press, 1956. Hanke, Steve. H. “New Hyperinflation Index (HHIZ) Puts Zimbabwe Inflation at 89.7 Sextillion Percent”. December 17, 2010. Zimbabwe, 2009. < http://www.cato.org/zimbabwe> Hanke, Steve. H. & Kwok, Alex, K. F. “On the Measurement of Zimbabwe’s Hyperinflation”. December 17, 2010. Journal, 2009. < http://www.cato.org/pubs/journal/cj29n2/cj29n2-8.pdf> Mac OS, “Hyperinflation”. December 17, 2010. McCain, No Date. < http://faculty.lebow.drexel.edu/McCainR//top/prin/txt/probs/infl7.html> Makochekanwa, Albert. “A Dynamic Enquiry into the Causes of Hyperinflation in Zimbabwe”. December 17, 2010. University of Pretoria. 2010. < http://web.up.ac.za/UserFiles/WP_2007_10.pdf> Web Archieve, “Hyperinflation: Causes, Cures”. December 17, 2010. Economy Viewpoint, 2003. Read More