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Thursday, 14 October 2010

Definition of Severe Hyperinflation - Updated

      The IASB proposes to define severe hyperinflation as follows:
      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,
      In fact, it is exactly the opposite: severe hyperinflation stops when (b) “exchangeability between the currency and a relatively stable foreign currency does not exist.”
      D28 (b) is thus not a definition of severe hyperinflation, but, a definition of when severe hyperinflation stops.
      Severe hyperinflation is only possible when there is exchangeability with at least one relatively stable foreign currency.
      The one exchange rate that lasted till the end of hyperinflation in Zimbabwe was the Old Mutual Implied Rate (OMIR).
      “The ratio of the Old Mutual share price in Harare to that in London equals the Zimbabwe dollar/sterling exchange rate." p8
      Severe hyperinflation stops the moment exchangeability between the currency and all foreign currencies does not exist.
      “Zimbabwe ’s hyperinflation came to an abrupt halt. The trigger was an intervention by the Reserve Bank of Zimbabwe . On November 20, 2008, the Reserve Bank’s governor, Dr. Gideon Gono, stated that the entire economy was “being priced via the Old Mutual rate whose share price movements had no relationship with economic fundamentals, let alone actual corporate performance of Old Mutual itself” (Gono 2008: 7–8). In consequence, the Reserve Bank issued regulations that forced the Zimbabwe Stock Exchange to shut down. This event rapidly cascaded into a termination of all forms of non-cash foreign exchange trading and an accelerated death spiral for the Zimbabwe dollar. Within weeks the entire economy spontaneously “dollarized” and prices stabilized.” p 9-10 
      There was severe hyperinflation in Zimbabwe while there was exchangeability with at least one relatively stable foreign currency – the British Pound in this case. When this last exchangeability stopped it was not possible to set prices in the ZimDollar any more and severe hyperinflation stopped: no exchangeability means no severe hyperinflation.
      I thus suggest that D28 (b) should be changed to: “(b) exchangeability between the currency and most relatively stable foreign currencies does not exist,”
      1,2 Hanke, S. H. and Kwok, A. K. F., On the Measurement of Zimbabwe’s Hyperinflation, Cato Journal, Vol. 29, No. 2 (Spring/Summer 2009), pp. 353-64 Available at http://www.cato.org/pubs/journal/cj29n2/cj29n2-8.pdf
      Copyright © 2010 Nicolaas J Smith