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Currency Failures from Argentina to Zimbabwe

Mises Circle Greenville 2010. A Brief History of Inflation. Currency Failures from Argentina to Zimbabwe. Taxes Borrow (implies a tax, inflation, or default later) Inflate (seigniorage; tax on money holdings). Government Sources of Funds. Hyperinflation in Germany. Date Price in marks.

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Currency Failures from Argentina to Zimbabwe

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  1. Mises Circle Greenville 2010 A Brief History of Inflation Currency Failures from Argentina to Zimbabwe

  2. Taxes Borrow (implies a tax, inflation, or default later) Inflate (seigniorage; tax on money holdings) Government Sources of Funds

  3. Hyperinflation in Germany Date Price in marks • Price of a newspaper in Germany, 1921-1923: Source: Mankiw, Macroeconomics, 5th ed., pp. 105-106

  4. Hyperinflation in Germany

  5. Hyperinflation in Germany Source: Mankiw, Principles of Macroeconomics, 3rd ed. (2004), instructor ancillaries

  6. In 1923, highest denomination was 100 trillion marks • Fiscal reform ended the inflation • At the end of 1923, the number of government employees was cut by a third • A new central bank was created • This demonstrated a commitment to not printing money Hyperinflation in Germany Source: Mankiw, Macroeconomics, 5th ed., pp. 105-106

  7. Reached 1426% Hyperinflation in Austria (1921-1923) Source: Mankiw, Principles of Macroeconomics, 3rd ed. (2004), instructor ancillaries

  8. Hyperinflation in Hungary (1921-1924) Source: Mankiw, Principles of Macroeconomics, 3rd ed. (2004), instructor ancillaries

  9. 1946 hyperinflation was even worse • Resulted in largest denomination note ever issued by any country: Hyperinflation in Hungary 100 Million Bil-Pengo (1946): 100,000,000,000,000,000 units Image source: Tom Chao’s Paper Money Gallery: http://www.tomchao.com/eu/eu29a.html

  10. Prices doubled every 13-15 hours 41.9 quadrillion percent/month When replaced by the forint in August, 1946, 400 octillion pengo became 1 forint. Hyperinflation in Hungary Investmentwatchblog.com; image source: Tom Chao’s Paper Money Gallery: http://www.tomchao.com/eu/eu29a.html

  11. By the end of the 1980s, inflation was about 200 percent a month. In December 1989, peak annualized inflation was 4,923.3 percent. Inflation in Argentina http://cdnedge.bbc.co.uk/1/hi/business/1721061.stm; investmentwatchblog.com

  12. Inflation in Argentina 1981-1983 http://www.tomchao.com

  13. 1990: Move toward markets/privatization In April 1991, Argentina linked its currency to the dollar (a “currency board”). From 1991-1994, Argentina’s economy grew at a rate of about 7.7 percent a year. 1989: Gov’t expenditure was 35.6% of GDP 1995: Gov’t expenditure was 27% of GDP Inflation in Argentina http://cdnedge.bbc.co.uk/1/hi/business/1721061.stm; investmentwatchblog.com

  14. “Growth” was another inflationary boom, however. Argentina’s money supply rose by 60 percent a year from 1991-1994. Money creation abruptly stopped in 1998, triggering a corrective recession. Inflation in Argentina http://mises.org/article.aspx?control=890

  15. The money supply contracted from 1999-2001. Banking confidence fell, and there was a run on Argentine banks. Bank withdrawals were restricted, while the peso devalued. Prices rose significantly in 2002 (not hyperinflation this time) Inflation in Argentina http://mises.org/article.aspx?control=890

  16. Inflation in Argentina Note: Annual Variation in the Consumer Price Index (IPC) and the Producer Price Index (IPIM) Source: Instituto Nacional de Estadísticas y Censos and LatinFocus calculations

  17. Inflation in Argentina • Estimates at the beginning of 2010 indicated that Argentinian inflation in 2009 was the 3rd highest inflation worldwide (after the Congo and Venezuela). • Actual inflation may be much higher than official reports—maybe 20-30 percent in 2010. http://www.xe.com/news/2010-10-15%2017:10:00.0/1462621.htm

  18. In 1994, inflation reached 2,075.8%, so that a cruziero from 1967 had become worth less than one trillionth of a U.S. cent. The real was adopted: 1 new real was worth 2,750,000,000,000,000,000 old (1942) reals. HyperInflation in Brazil (1986-1994) investmentwatchblog.com

  19. “In 1986, President José Sarney of Brazil… froze prices, controlled wages, and lopped three zeroes off the Brazilian currency. …Higher prices were quickly replaced by other problems. Severe shortages of daily necessities such as eggs, meat, and milk developed. Black markets quickly filled the vacuum, resulting in higher prices that didn’t show up in official inflation figures.” “Repressed” Inflation in Brazil http://www.thefreemanonline.org/columns/hyperinflation-lessons-from-south-america/

  20. Hyperinflation from 1991-1995. Two currency reforms: kwanza to novo kwanza back to kwanza. Overall impact to date: 1 current kwanza = 1,000,000,000 old kwanza. Hyperinflation in Angola

  21. From 1971-1991, Yugoslavia had an average annual inflation rate of 76% • Only Zaire and Brazil had a higher inflation rate. • In December 1990, the Serbian parliament ordered the Serbian National Bank (a regional central bank) to issue large amounts of credits to friends of Slobodan Milosevic. Hyperinflation in Yugoslavia Source: Steve Hanke in April 28, 1999 Wall Street Journal

  22. This amounted to more than half the planned increase in the money supply for all of Yugoslavia in 1991 Croatia and Slovenia broke away In January 1992, hyperinflation began Hyperinflation in Yugoslavia Source: Steve Hanke in April 28, 1999 Wall Street Journal

  23. In January 1994, the official monthly inflation rate reached 313 million percent • This was the second-highest monthly rate (after Hungary in 1946) • …and the second-longest (after the Soviet hyperinflation of the early 1920s) • People spent their time trying to exchange dinars for marks or dollars on the black market Hyperinflation in Yugoslavia Source: Steve Hanke in April 28, 1999 Wall Street Journal

  24. The Yugoslav mint was producing 900,000 bank notes a month, in denominations of up to 500 billion dinars Hyperinflation in Yugoslavia Source: Steve Hanke in April 28, 1999 Wall Street Journal; image from National Bank of Serbia

  25. 1 novi dinar in 1994 = 1,300,000,000,000,000,000,000,000,000 pre-1990 dinars • On January 6, 1994, the government gave up and declared the German mark legal tender • Tying a “superdinar” to the mark reduced inflation Hyperinflation in Yugoslavia Source: Steve Hanke in April 28, 1999 Wall Street Journal

  26. Inflation in Zimbabwe

  27. “Mr. Mugabe's government has printed trillions of new Zimbabwean dollars to keep ministries functioning and to shield the salaries of key supporters...” (NYT, May 2006) November 2008 estimates put Zimbabwe's annual inflation rate at 89.7 sextillion (1021) percent. (http://www.cato.org/zimbabwe) Prices doubled every 24.7 hours. Inflation in Zimbabwe Photo from BBC News, http://news.bbc.co.uk/2/hi/africa/5231836.stm (http://en.wikipedia.org/wiki/Hyperinflation)

  28. December 2008: inflation at 6.5 quindecillion novemdecillion percent (65 followed by 107 zeros). Late January 2009: citizens allowed to conduct business in any currency Inflation in Zimbabwe Photo from BBC News, http://news.bbc.co.uk/2/hi/africa/5231836.stm http://en.wikipedia.org/wiki/Zimbabwe_dollar

  29. Other Hyperinflations • Bolivia (1984-1986) – 20,000% peak • Chile (1971-1973) – peaked at 1,200% • Greece (1942-1944) – 8.5 billion % inflation/month • Russia (1992-1994) – 2,520% in 1992. • Ukraine (1993-1995) – 1,400% a month http://en.wikipedia.org/wiki/Hyperinflation

  30. Costs of Inflation “When people talk of a ‘price level,’ they have in mind the image of a level of a liquid which goes up or down according to the increase or decrease in its quantity, but which, like a liquid in a tank, always rises evenly. Ludwig von Mises

  31. Costs of Inflation “But with prices, there is no such thing as a ‘level.’ Prices do not change to the same extent at the same time. There are always prices that are changing more rapidly, rising or falling more rapidly than other prices.” Ludwig von Mises

  32. Where the new money enters the economy is important (“Cantillon Effects”). • If the government spends the new money first, then the things government buys will see price increases first • Who gains? People who sell to the government • Who loses? People who are in competition with the government, who buy what it buys Costs of Inflation

  33. Unexpectedly high inflation is redistributive • With fixed interest rates, lenders lose, as purchasing power of repayment is lower than was anticipated. • Borrowers gain • Unexpectedly low inflation redistributes as well • Lenders gain, borrowers lose Costs of Inflation

  34. Inflation can create business cycles • Pushing interest rates down can create the impression that long-term projects are more profitable • People invest in those long-term projects by buying capital for them • When the interest rate comes back up from its artificially low levels, the capital investments lose value • Stock prices drop, people are laid off. Costs of Inflation

  35. Inflation Potential in the US

  36. Inflation Potential in the US

  37. Inflation Potential in the US

  38. Commodity standards • Price controls • Hidden inflation—monetary price increases but is not measured • Black market transactions • Hidden quality deterioration • Repressed inflation—shortages and queues develop Stopping Inflation

  39. Questions? tterrell@mises.com

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