Pages

Saturday, 9 October 2010

Definition of Severe Hyperinflation

I was of the opinion that severe hyperinflation was impossible if “exchangeability between the currency and a relatively stable foreign currency does not exist” as stated in Par D28 of the IASB Exposure Draft about Severe Hyperinflation.
I asked Dr Eric Bloch who is a Zimbabwean independent economist and commentator who experienced the complete hyperinflationary period in Zimbabwe whether he agreed with me. This is his reply:

"I respectfully differ with your view, for I consider that hyperinflation can exist even in an environment where :
a) No reliable/ authoritative Consumer Price Index or alternative general price index exists ; and
b) There is no exchangeability between the currency and a relative stable foreign currency ;
albeit that in the absence of the aforegoing, measurement of the extent of the hyperinflation is exceptionally difficult.
Despite the restricted ability to quantify the magnitude of inflation, in the absence of a reliable price index or authoritative exchange rates, if prices are escalating to an extent that consumer power progressively diminishes substantially, then hyperinflation exists e.g. if in one month a person’s total income will only purchase, say, one –half of the quantity of identical goods that that income would purchase in the preceding month, then clearly hyperinflation exists.
Further illustrative of the aforegoing, after Zimbabwe’s Central Statistical Office ceased computing the Consumer Price Index in July 2008, I sometimes applied as my measure of the extent of certain price movements the number of hours that I had to work in one month, as compared to previously, to purchase particular commodities."

I agree that as long as prices are being set in the local hyperinflationary currency, then there is hyperinflation. There is also exchangeability. What exchangeability? Not exchangeability between the local currency and relatively stable foreign currencies, but, exchangeability between the value of a very restricted range of goods and services in the economy and the local currency - to a very limited extent: only in some goods and services, for example the government will continue paying civil service salaries in the local currency. Locals can perhaps only use that money to pay for taxi fares because the taxi operators can buy petrol only from the government distributors paying with the local currency.
I would thus suggest that the following addition – underlined – should be made to Par D28:

D28 The currency of a hyperinflationary economy is subject to severe hyperinflation if it has both of the following characteristics:
(a) a reliable general price index is not available to all entities with transactions and balances in the currency,
(b) exchangeability between the currency and a relatively stable foreign currency does not exist,
as long as some prices are still being set in the local hyperinflationary currency.

Copyright © 2010 Nicolaas J Smith