After reading this, I wonder "How can a government stop hyperinflation?"
What can other governments do to help?
And for completeness, How do governments keep currency stability?
-
1you don't want to stop inflation, that creates a whole new set of problems, including economic stagnation. you want to keep inflation at "acceptable" levels, and that's why hyperinflation is a problem.– FedericoNov 29, 2016 at 9:48
-
Thanks, I should clarify that I'm talking about hyperinflation.– pensonoNov 29, 2016 at 9:48
-
Around bullet 2 and Venezuela then it will be very interesting if the UK will be forced to hand over the nations gold reserves. But it can go both ways even if they get the gold.– Thomas KoelleApr 22, 2021 at 12:16
Add a comment
|
2 Answers
Runaway or hyperinflation occurs when there is a lot more money than there are goods at current prices. In theory, you could fix this two ways.
First, you could flood the economy with goods, reducing the monetary pressures. I don't know that anyone has really tried that against hyperinflation, as the amount of goods required would be tremendous.
Second and more commonly, you reduce the money supply or at least stop it from growing. This often involves replacing the existing, near valueless, currency with a new currency. So if it takes a thousand bills to make a reasonable purchase, you exchange one new bill for a thousand of the old. The important part is that people and markets need to be confident that the new currency won't also be overprinted.
In practice, hyperinflation is generally triggered by a shortage of goods. The shortage causes increasing prices. The government attempts to overcome this by printing more currency, which is the exact wrong thing to do. Because the shortage is still there, the government can never catch up. They provide more bills. People with more bills bid up prices. Still a shortage. The government provides more bills. Prices increase. Still a shortage.
The essential problem is that more money doesn't make more goods. So printing money to fix a shortage in goods is much like a dog chasing its tail. The faster it goes, the faster its target recedes. Only worse, since the dog stays the same size. Under hyperinflation, an economy shrinks.
Ideally, the first thing to fix is the shortage in goods. Then a stable currency can be created. If the government can't do that, then the problem gets worse before it gets better. In the early stages of moving from hyperinflation to normal growth, already bad unemployment increases more.
The two things that external governments can do are to provide more goods to address the original shortage and to help restore confidence in the currency. Possibly by accepting payment for the goods in the currency and then holding it. Another alternative would be for more trusted foreign central banks to manage the money supply. Of course, most countries don't want to surrender control of their money supply in that way.
To avoid hyperinflation from starting, countries need to limit their currency growth to match production growth. And maintain an environment in which production is stable or growing. If production does fall, the government has to allow a recession rather than trying to cover it up by overprinting currency.
-
Venezuela's situation was slightly different as far as nuances of how hyperinflation started (same large scale reasons, of course).– user4012Nov 29, 2016 at 16:07
-
2You can't flood the economy with goods, because there is no mechanism to do that. Also, think about what people do with tangible goods in a inflationary market.– user9790Nov 29, 2016 at 18:29
-
Hyperinflation is not caused by an oversupply of goods. It's the reverse. Venezuela has hyperinflation right now because of an over supply of money (as it printed to pay off debts, foreign and domestic as oil prices plunged) that's becomes more and more worthless over time. Consumers buy tangible property right away to offset that because literally in a day or two it could be twice as much. But the real problem is that per capita GDP is falling and has been due to inefficiencies with Socialism economies. They never had much to begin with.– user9790Nov 29, 2016 at 18:34
-
-
"Hyperinflation occurs when there is a lot more money than there are goods on the market". Part of hyperinflation is that people won't sell today what they could also sell tomorrow for more money. In fact, why sell at all, instead of bartering? Of course, perishable goods are an exception, because they can go bad even quicker than the money itself, but toilet paper for instance is a classical example of a non-perishable consumer good.– MSaltersDec 2, 2016 at 15:53
If governments want to control Inflation, hyper or otherwise, they need to reduce the money supply.
answered Nov 29, 2016 at 11:45
