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Effects of Inflation
Effects of Inflation
INFLATION
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Inflation:
In economics, inflation is a rise in the general level of prices of goods
and services in an economy over a period of time.
When the price level rises, each unit of currency buys fewer goods
and services; consequently, inflation is also erosion in the purchasing
power of money – a loss of real value in the internal medium of
exchange and unit of account in the economy.
A chief measure of price inflation is the inflation rate, the annualized
percentage change in a general price index (normally the Consumer
Price Index) over time.
Inflation can have positive and negative effects on an economy.
Negative effects of inflation include loss in stability in the real value
of money and other monetary items over time; uncertainty about
future inflation may discourage investment and saving, and high
inflation may lead to shortages of goods if consumers begin hoarding
out of concern that prices will increase in the future. Positive effects
include a mitigation of economic recessions, and debt relief by
reducing the real level of debt.
When inflation rate is less that or greater than the expected rate, it is
known as Unanticipated Inflation rate.
Inflation is a crime against the poor who experience a fall in their real
incomes during a period of sustained price rise.
The firms will gain during the intervening period between anticipated
price rise and its compensation to labor.
Hence during inflation, rich become richer and poor become poorer.
The workers who do not get compensated for the increase in price
rise, experience reduction in real incomes because their nominal
income remains constant for a long period.
Most effects of inflation are negative, and can hurt individuals and
companies alike, below are a list of negative and “positive” effects of
inflation:
5. Existing creditors will be hurt (because the value of the money they
will receive from their borrowers later will be lower than the money
they gave before).
3. It can benefit the cartels (it benefits big cartels, destroys small sellers,
and can cause price control set by the cartels for their own benefits).
4. It might relatively benefit borrowers who will have to pay the same
amount of money they borrowed (+ fixed interests), but the inflation
could be higher than the interests, therefore they will be paying less
money back. (example, you borrowed $1000 in 2005 with a 5% fixed
interest rate and you paid it back in full in 2007, let’s suppose the
inflation rate for 2005, 2006 and 2007 has been 15%, you were
charged %5 of interests, but in reality, you were earning %10 of
interests, because 15% (inflation rate) – 5% (interests) = %10 profit,
which means you have paid only 70% of the real value in the 3 years.
Note: Banks are aware of this problem, and when inflation rises, their
interest rates might rise as well. So don't take out loans based on this
information.
5. Many economists favor a low steady rate of inflation, low (as opposed
to zero or negative) inflation may reduce the severity of economic
recessions by enabling the labor market to adjust more quickly in a
downturn, and reducing the risk that a liquidity trap prevents
monetary policy from stabilizing the economy. The task of keeping
the rate of inflation low and stable is usually given to monetary
authorities. Generally, these monetary authorities are the central banks
that control the size of the money supply through the setting of
interest rates, through open market operations, and through the setting
of banking reserve requirements.
7.
The first three effects are only positive to a few elite, and therefore might not
be considered positive by the general public.
3. If you have a variable-rate mortgage, fix it if you can find a good deal,
have a low fixed interest rate or 0% interest if you can find one.
5. Invest in things that you're going to use anyway and will serve you for
a long time.
11.Use the money saving tips such as: you need to reduce your
consumption of things that are rising rapidly in price (eg, gas) without
having to reduce your consumption of goods that are rising less
rapidly or even falling in price (eg, clothes).
12.Buy only what you need, especially objects that have multi-tasks, and
are considered durable goods.
The conclusion from all this is: You don’t have to live cheap, just live
smart!
Hyperinflation:
Hyperinflation could be defined as a very high inflation, a condition in
which prices increase rapidly as a currency loses its value. In numbers,
hyperinflation could mean a cumulative inflation rate over three years
approaching 100% to an inflation exceeding 50% a month, in other words,
let’s say today is June 1st 2009, if you have $20 today, with an inflation of
100% a month, your $20 will only have the value of $2.50 at the end of the
September 2009, that would mean that you’re living in hyperinflation times.
During hyperinflations, frequently people go back to trading and bartering
and this way, it was very common in the Weimar Republic, and in recently
in Zimbabwe, the buyers and sellers do not have to worry about the loss of
the value of money. For example, in a healthy economy the corn sales man
can sell them for money and then change this money in for gas for his
tractor. But during hyperinflation, while he is selling the corn for money and
buys gas for his tractor, the price of gas could have increased so much that
he is not longer able to buy gas for his tractor, so they chose the “safer”
option which is to barter.
It’s is also important to understand this phenomenon in order to survive it or
minimize its damage, note that hyperinflation is often associated with wars,
their aftermath, or in economic depressions.
Causes of Hyperinflation:
A hyperinflation is mainly caused by an extremely rapid growth in the
supply of paper money. This occurs when the monetary and fiscal authorities
of a nation regularly issue large quantities of money to pay for a large stream
of government expenditures. In fact, inflation is a form of taxation in which
the government gains at the expense of those who hold money while its
value is declining. So many economists consider hyperinflation as a very
large taxation scheme.
Often the body responsible for printing the currency cannot physically
print paper currency faster than the rate at which it is devaluing, thus
neutralizing their attempts to stimulate the economy.
To know if you're living in a hyperinflation times, check for the symptoms:
People prefer to keep their wealth in non-monetary assets or in a
relatively stable foreign currency.
People regard monetary amounts not in terms of the local currency but
in terms of a relatively stable foreign currency. Prices may be quoted
in that foreign currency.
Sales and purchases on credit take place at prices that compensate for
the expected loss of purchasing power during the credit period.
Causes the monetary base, whether specie or hard currency, to flee the
country.
In short, the major causes for a hyper inflation are an unchecked increase in
the money supply (or drastic debasement of coinage) usually accompanied
by a widespread unwillingness to hold the money for more than the time
needed to trade it for something tangible to avoid further loss.
Effects of Hyperinflation:
Hyperinflation effects are almost similar to high inflation effects, except that
they’re more serious, the most serious consequence of hyperinflation is the
reallocation of wealth. It transfers wealth from the general public, which
holds money, to the government, which issues money. Hyperinflations also
cause borrowers to gain at the expense of lenders when loan contracts are
signed prior to the worst inflation. Check out more effects by visiting our
page above.
Hyperinflation in History:
Hyperinflation is not a particularly uncommon episode in human history. It
has occurred in the following countries: Weimar Republic of Germany 1920
– 23 (466 billion percent from starting value), Zimbabwe 2003 - Now (231
million percent from starting value), Argentina 1975 – 1983 (1,000 percent
from starting value), Bosnia-Herzegovina 1992 – 93 (100,000 percent from
starting value). Here are some common examples in more details:
But some believe that the government found reparations a convenient excuse
and that there might be other reasons that might have triggered the
hyperinflation. Other possible causes included bankers and speculators
(particularly foreign), both of which groups had, in fact, exacerbated the
hyperinflation through the normal course of their profit-seeking. The
inflation reached its peak by November 1923, but ended when a new
currency (the Rentenmark) was introduced. The government stated that this
new currency had a fixed value, secured by real estate, and this was
accepted.
Hyperinflation in Zimbabwe:
Hyperinflation was not a common place for Zimbabwe, because 30 years
ago the Zimbabwe dollar was worth about USD 1.25. However in July 22nd,
2008, the value of the ZWD had fallen to approximately 688 billion per 1
USD. Since the country’s independence, rampant inflation and the collapse
of the economy have severely devalued the currency, causing many
organizations to favor using the US dollar or South African rand instead.
Inflation was stable until Robert Mugabe began a program of land reforms
that primarily focused on taking land from white farmers and redistributing
those properties and assets to black farmers; this in turn sent food production
and revenues from export of food plummeting, one more main reason that
contributed to inflation in Zimbabwe was a monetary phenomena (the result
of Mugabe's government printing money) as can be seen by the appearance
of ever higher face value printed notes, whose face value exceeded the sum
of all previously existing notes.
Hyperinflation started to take shape very early in the 21st century Zimbabwe
in the shape of chronic inflation at first. Inflation reached 624% in 2004, and
then fell back to low triple digits before surging to a new high of 1,730% in
2006. During that time, the Reserve Bank of Zimbabwe revalued their
currency on August 1, 2006 at a rate of 1,000 old Zimbabwean dollars to 1
revalued Zimbabwean dollar. In June 2007, inflation in Zimbabwe had risen
to 11,000% year-to-year from an earlier estimate of 9,000%. On May 5th,
2008 the Reserve Bank of Zimbabwe issued bank notes or "bearer checks"
for the value of ZWD 100 million and ZWD 250 million. Ten days later on
May 15th, new bearer checks with a value of ZWD 500 million (then
equivalent to about USD 2.5) were issued. Five days later on May 20th, a
new series of notes in the form of "agro checks" were issued in
denominations of ZWD 5 billion, ZWD 25 billion and ZWD 50 billion. An
additional agro check was issued for ZWD 100 billion on July 21st.
Meanwhile inflation has officially surged to 2,200,000% with some analysts
estimating figures surpassing 9,000,000 percent. As of July 22nd, 2008, the
value of the ZWD had fallen to approximately 688 billion per 1 USD, or 688
trillion pre-August 2006 Zimbabwean dollars. On August 1, 2008, the
Zimbabwe dollar was redenominated by removing 10 zeroes. ZWD 10
billion became 1 dollar after the redenomination. On August 19, 2008,
official figures announced for June estimated the inflation over 11,250,000
percent. Zimbabwe's annual inflation was 231,000,000% in July (Prices
doubling every 17.3 days). At the beginning of November, 2008, the
inflation rate was calculated to be at 516 quintillion percent
(516,000,000,000,000,000,000%). The monthly inflation was 13.2 billion
percent.
Hyperinflation affects almost everyone, therefore it's hard to avoid, but you
can take some steps to minimize its negative effects and survive until it's
over.
Bibiliography:
1. Wikipedia
3. Self Knowledge