Sunday, 7 November 2010

Hyperinflation has no effect on the real value of non-monetary items

A vicious circle is created in which more and more inflation is created with each iteration of the ever increasing money printing cycle. This is not the same as and has nothing to do with, for example, the US Federal Reserve Bank´s and the Bank of Japan´s "Quantitative Easing (QE)" programs. This was, in fact, exactly the same as the Reserve Bank of Zimbabwe´s money printing program.

Hyperinflation becomes visible when there is an unchecked increase in the money supply (see hyperinflation in Zimbabwe) usually accompanied by a widespread unwillingness on the part of the local population to hold the hyperinflationary money for more than the time needed to trade it for something non-monetary to avoid further loss of real value. Hyperinflation is often associated with wars (or their aftermath), currency meltdowns like in Zimbabwe, and political or social upheavals.

"Hyperinflations have never occurred when a commodity served as money or when paper money was convertible into a commodity. The curse of hyperinflation has only reared its ugly head when the supply of money had no natural constraints and was governed by a discretionary paper money standard." p1

Hyperinflation normally results in severe economic depressions although that did not happen during the 30 years of very high and hyperinflation in Brazil from 1964 to 1994 because all non-monetary items (such as property, plant, equipment, inventory, finished goods, quoted and unquoted shares, trade marks, issued share capital, retained earnings, capital reserves, all other items in shareholders' equity, trade debtors, trade creditors, provisions, all other non-monetary payables, all other non-monetary receivables, taxes payable, taxes receivable, salaries payable, salaries receivable, etc.) in the entire economy of Brazil were updated daily in terms of a daily non-monetary index supplied by the government which was principally directly related to the change in the daily US dollar exchange rate for the Brazilian currency. This confirmed the fact that hyperinflation like low inflation can only destroy the real value of money and other monetary items. Hyperinflation (like low inflation) has no effect on the real value of non-monetary items. Purchasing power of non monetary items does not change in spite of variation in national currency value. p9

This was not done during Zimbabwe's hyperinflation although the daily change in the parallel rate for the US dollar as well as the Old Mutual Implied Rate (OMIR) were both available to everyone in Zimbabwe on a daily basis and eventually resulted in the wiping out of the real value of only those non-monetary items (such as salaries, wages, issued share capital, all other items in shareholders´ equity, trade debtors, trade creditors, salaries payable, salaries receivable, taxes payable, taxes receivable, all other non-monetary payables, all other non-monetary receivables, etc.) expressed in terms of the ZimDollar and never or not fully updated (inflation-adjusted) during Zimbabwe's hyperinflation. Zimbabwe's hyperinflationary monetary meltdown, on the other hand, resulted in the wiping out of the real value of all monetary items (actual 100 trillion Zimbabwe dollar bank notes, all other bank notes, all loans payable and all loans receivable and all other monetary items) expressed in terms of the hyperinflationary Zimbabwe Dollar which became completely worthless after severe hyperinflation which stopped abruptly the moment exchangeability between the currency and all foreign currencies did not exist anymore.

"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." p9-10.

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