The U.S. government, is perhaps stimulating growth in the moribund economy by stoking the fires of inflation. But by leaving interest rates low and buying up bonds - a policy known as quantitative easing (QE) - the U.S. Federal Reserve risks debasing the dollar, which could lead to a prolonged period of hyperinflation that would send prices skyrocketing.
Lower inflation warranted looser monetary Policy. Banks are willing and prepared to ease policy to boost inflation expectations shortly. The Government was keeping interest rates at record lows, and purchased $ 1.7 trillion of US securities to keep the economy in subdued humour. Another round of expectant quantitative easing would make the economy further sober.
The weary financial system, already hanging with bouts of flows of money, with further money flowing into the system, the Government may well be sowing the seeds of hyperinflation. With pumping in more and more Cash into the System, deficits of $1.3 trillion and additional QE of $1 trillion on the table, the odds are getting greater all the time that a bout of hyperinflation could be in the cards. Hyperinflation can be simply defined as very high inflation, a condition in which prices increase rapidly as a currency loses its value. It usually occurs when monetary and fiscal authorities of a nation issue large quantities of money to pay for a large stream of government expenditures.
In numbers, hyperinflation could mean anything from a 100% cumulative inflation rate over three years to inflation exceeding 50% a month. For example, an inflation rate of 100% a month would reduce the value of a $20 bill to $2.50 in four months.
In order to sustain the economy, and bail out banks with $ 700 billion ‘Troubled Asset Relief Programme (TARP) and a stimulus programme worth $ 787 billion to boost the battered economy, and launching of a near $ 1 trillion rescue of government backed housing authorities, the Government has racked up $ 12.7 trillion in debt guarantees. Without hard assets like Gold in store to back these guarantees, the only alternate for the Government is to print more money to meet its debt obligations.
Hyperinflation can also be viewed as a form of taxation. 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.
A few examples of predominant occurrence of hyperinflation in world economic history are recounted below:-
Germany or the Weimar Republic went through its worst inflation in 1923. The highest currency issued was a 100,000,000,000,000 Mark note, which was the equivalent of about US $ 25. The rate of inflation peaked at 346% per month, meaning prices doubled every two days. The main cause is believed to be the "London ultimatum" in May 1921, which demanded reparations in gold or foreign currency to be paid in annual installments of 2 billion gold marks plus 26% of the value of Germany's exports. Although the Government blamed the massive run up in prices in the hefty war reparations due as a result of the Treaty that ended World War I, many experts say and feel that those payments accounted for only a third of that Country’s deficit. Bankers and Foreign speculators exacerbated the price of escalation, which during the last half of 1922 saw the cost of living index soar from 41 to 685(increase by more than 16 times roughly). 60 marks to the US Dollar in the early 1921 to 8000 marks to a Dollar in Dec 1922. Paper mark/Gold ratio rose from 1 in 1921 to 1 trillion in 1923!
On July 22, 2008, the value of the Zimbabwe dollar had fallen to approximately 688 billion per US $ 1. After the country's independence, 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. Rampant hyperinflation ensued when this policy sent food production and revenues from exports of food plummeting;
Hyperinflation in post World War II Hungary may be the highest on record. In April 1946, prices zoomed higher by 195% every day, meaning they doubled every 15.6 hours. The war caused enormous costs and, later, even higher losses to the relatively small and open Hungarian economy. The national bank was practically under government control. The government spent more than it could raise in taxes and the central bank printed more paper money to finance the deficit.
America has the financial strength and capacity to keep the hyperinflation under raps by balancing its interest rates to keep runway inflation in check. However, unless watched, inflation tends to take off rather quickly. If the prices bubble in few short months, inflation would be a hard not to crack.
There are business people, who sensing inflation, convert money into stocks of commodities and hoard them, creating artificial scarcity in the Market;
Distortion of relative prices;
People tend to convert their assets into non monetary ones or keep their assets in relative 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.
Then how do people protect themselves from inflation and lowering of their purchasing Power.
Government need to control their free wheeling spending. Bring in discipline in spending. Reduce stimulus. Take action to prevent the rise in prices for hard assets. Take precaution against hoarding, high exchange of currency in the market.
India is in a similar plight, as the tweedledum and tweedledee Policy in raising and lowering interest rates, and meddling with the export stimulus, hazy decisions to bring down the Non Performing Assets (NPA) by writing off Crores of Rupees worth of loans from the agricultural debt, playing with the saving interest rates without appropriate planning in developing thrift. Hoarding in Food grains, edible oils, and indiscreet import of commodities including Crude and edible oils, increasing continuously the prices of petroleum products saying they are inevitable, and nervous cycle of food and common inflation, Consumer Price Index showing lazy upward movements, all show that India too is slowly entering the league of Countries where hyperinflation will make a foray. Better beware.
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