What of Hyperinflation Extremely rapid growth in the supply

What is HyperInflation

 

In economics pints of view hyperinflation is a macroeconomic factor that is
out of control, a Situation where prices increase quickly as currency
loses its value. According to International Accounting Standards
Board’s hyperinflation is a sum of inflation rate over
three years approaching 100% (26% per annum compounded for
three years in a row).

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The main reason of hyperinflation is a huge increase in the amount
of money that is not supported by the growth of goods and services. This
results in an imbalance between the supply and demand for the money, along with
complete loss of confidence in the currency.

In Classical economics as well as in monetarism it’s the
irresponsibility of monetary authority borrowing money to pay all its expenses
causes the Hyperinflation.

 

Causes of Hyperinflation

 

Extremely rapid growth in the supply of paper money causes
hyperinflation. This happens when the both authorities (monetary and fiscal) of
a country issue large quantities of money to pay for government
expenditures.

 

1.     
Increase in currency printing.

 

2.     
Devaluation of country’s
currency.

 

3.     
Mostly authority responsible
for printing the money cannot physically print paper currency faster than
the rate at which it is devaluing, thus neutralizing their attempts to
stimulate the economy.

 

4.     
During Periods of Civil war, or
internal conflict government needs to make the expenditure and to fund
this expenditure it might resort to Printing of Currency.

 

HYPERINFLATION  IN 
ZIMBABWE 

 

Zimbabwe is in the late stages of a classic hyperinflation.
Inflation is galloping ahead as the supply of Zimbabwe dollars surges and the
demand for them shrinks. Eventually, the currency will totally collapse as
people simply refuse to accept it.´ In recent months, facts on the ground have
validated this prognostication. The Zimbabwe dollar is dead

 

The hyperinflation index for Zimbabwe began on 5 January
2007, a month before Zimbabwe entered the hyperinflation zone. Due to a lack of
reliable data, It stopped reporting the inflation on 14 November 2008. This
index was based on non-cash Zimbabwe dollar transactions. These had accounted
for the bulk of transactions in Zimbabwe. By the end of November, however,
there were virtually no non-cash Zimbabwe transactions taking place and the
Zimbabwe Stock Exchange had stopped trading.

Even though the Zimbabwe paper money remnant circulates
alongside foreign currencies, its real value is tiny, its use is limited, and
its value against the U.S. dollar is cut in half every two days. Zimbabwe
failed to break Hungary’s 1946 world record for hyperinflation.

Zimbabwe’s
struggle for economic growth and poverty reduction remain strong and the
country can tackle its political factors and build a competitive investment policies.
The economy is projected to grow by just over 2% in 2017 as it recovers from
two years of drought, but is constrained by macroeconomic imbalances.

 

Agents were forced to switch from financial transactions towards
barter due to hyperinflation. It’s exactly what happened in Zimbabwe.

Thus the whole nation started trading in commodities. If they are
paid in commodities, they used to spend the amount as soon as they could. So
the capital erodes continuously and the efficiency of an economy falls. This
can be explained with table below

Ø  Government
printing money in response to:

1.       Expectations
of hyperinflation

2.       Decline
in economic output.

3.       High
national Debt

4.       Price
controls which exacerbate shortages.

5.       Decline
in export earnings.

 

Ø 
Zimbabwe government introduced a
series of land reforms in 1990. This included redistributing land from white
farmers to black farmers. But the new farmers struggled to produce food due to
lack of experience , and there was a large fall in food production.

 

Ø 
The economy noticed fall in
output (both agricultural and manufacturing), and this caused a fall in bank
lending.

 

Ø 
The government increased the
rate at which they were printing currency and money supply increased.

 

Ø 
The government debt increased. The
government Started printing more money to finance the debt, which caused more
inflation. Bondholders experienced a fall in the value of their bonds.

 

Ø 
The economy also experienced
many shortages of goods.

 

Ø 
Due to the decline in output,
there were shortages of goods, which pushes prices up. Nominal demand was
rising because people had more paper money. This combination of more money
chasing fewer goods caused very rapid rises in price.  When there is a
shortage – prices rise. Combined with printing more money and this
shortage of actual goods, prices rose rapidly.

Ø  People
couldn’t afford basic goods. Prices were rising faster than wages and incomes. The loaf of
bread cost 2 billion however salary of employee used to be 1 billion.

 

Ø  No
credit available. Banks were closed and not willing to lend money. Due to inflation,
the value of debt could be soon washed out. Thus the business and individuals
had no access to credit. Normal business activity closed down and investment
was cut back.

 

Ø  Menu
costs. During
the day the inflation doubled, people used to exchange the money they got into
foreign currency as soon as they got. Prices were one price in the morning and
other on the way back.  The people wanted
to get rid of Zimbabwean currency.

 

Ø  Switch
to a barter economy. People started using barter system when there was no other way
as the value of currency was falling by passing every hour.

 

Ø  Lost
savings. People
who had savings lost everything – unless they were able to exchange with
foreign currency. Even those people who had property saw shrinks in prices.

 

Ø  Damage
to business confidence. Zimbabwean GDP shrank due rise in hyperinflation. It affects
investors for a long time.

Ø 
Representing his 2008 mid-term
monetary policy statement in Harare, the central bank governor slashed off
10 zeros from the country’s currency, thus
turning10 billion dollars into one dollar. At the same time, the governor
announced the introduction of a 500 dollar note.

 

Ø 
While introducing a new 25 cent
coin, Gono also announced the introduction of old coins which he hoped will
increase the amount of money in circulation.

 

 

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