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Thursday, 29 April 2010

SA can possibly experience hyperinflation if Julius Malema ever becomes President

In Zimbabwe hyperinflation reached such high levels that the real value of the country’s entire monetary supply was wiped out. Towards the end of the hyperinflationary spiral the total real value of the ZimDollar money supply halved every 24.7 hours. Eventually the ZimDollar had no value at all. South Africa has never experienced hyperinflation. I used to believe that SA will never experience hyperinflation. With the success of Julius Malema in South Africa I have changed my opinion. SA can possibly experience hyperinflation if Julius Malema one day becomes president of South Africa.

There is no money illusion in hyperinflationary economies. People know that hyperinflation destroys the real value of their money very quickly.

Central bank governors aid and abet money illusion by regularly stating in their monetary policy statements that they are “achieving and maintaining price stability.”

“The MPC remains fully committed to its mandate of achieving and maintaining price stability.”

TT Mboweni, Governor. 2009-06-25: Statement of the Monetary Policy Committee, SARB.

It is not always pointed out by governors of central banks that the “price stability” they mention, refers to their definition of “price stability”. Jean-Claude Trichet, the President of the European Central Bank, is a central bank governor who regularly mentions that 2% inflation is their definition of price stability. Absolute price stability is a year-on-year increase in the Consumer Price Index of zero per cent. The SARB´s definition of “price stability” “is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis.”

The SARB would aid in reducing money illusion by stating:

The MPC remains fully committed to its mandate of achieving and maintaining the SARB´s chosen level of price stability which is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis. Absolute price stability is a year-on-year increase in the CPI of zero per cent. Current 5.1 % annual inflation destroyed about R100 billion of the real value of the Rand over the past 12 months to the end of March, 2010. A one per cent decrease in inflation would maintain about R20 billion per annum of real value only in the SA monetary economy.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith