Monday, 18 June 2012

Monetary meltdown

Monetary meltdown
A monetary meltdown takes place when a hyperinflationary local currency monetary unit stops having exchangeability with all foreign currencies, normally after first a period of hyperinflation and then a period of severe hyperinflation. It happened in Zimbabwe on 20 November 2008.

The monetary economy (the total real value of the fiat money supply) can disappear completely from one day to the next. It happened three times during three months towards the end of hyperinflation in Yugoslavia. It happened at the end of hyperinflation in Zimbabwe in 2008, terminating severe hyperinflation in that country. Zimbabwe did not try hyperinflation again like Yugoslavia which has the distinction of having wiped out the real value of its entire monetary economy three times in three months. In Zimbabwe the economy dollarized spontaneously after a decision by the Reserve Bank of Zimbabwe to close the Zimbabwe Stock Exchange. That stopped the Old Mutual Implied Rate being the final exchange rate of the Zimbabwe Dollar with a foreign currency: the British Pound.

The Zimbabwean economy dollarized spontaneously after that because it was a sufficiently open economy right next to the stable South African, Botswana and other stable economies in the Southern Africa region. Those stable economies supplied the Zimbabwean economy with essential goods and services during and after hyperinflation.  Zimbabwe then had the opportunity to slowly recover from total monetary meltdown and the devastating effect of implementing the very erosive stable measuring unit assumption – the Historical Cost Accounting model – during hyperinflation as supported by the IASB and Big Four accounting firms like PricewaterhouseCoopers.. The implementation of the HCA model during hyperinflation is mistakenly accepted in International Financial Reporting Standards and mistakenly supported by Big Four accounting firms like PricewaterhouseCoopers. Zimbabwe spontaneously adopted a multi–currency dollarization model using the US Dollar, the Euro, the South African Rand, the British Pound and the Botswana Pula as relatively stable foreign currencies in the Zimbabwean economy in 2008.

The variable real value non–monetary item economy (fixed assets, land, property, plant, equipment, inventory, etc.) cannot disappear completely from the one day to the next because of wrong monetary policies. ‘Inflation is always and everywhere a monetary phenomenon.’ Inflation and hyperinflation have no effect on the real value of non–monetary items. After monetary meltdown in Zimbabwe the fixed assets, land, properties, plant, equipment, raw materials, finished goods, etc., were still there. The variable item economy can be destroyed by natural disasters like earth quakes and tsunamis and by man–made events like war, but not by hyperinflation.

The constant item economy (owners´ equity, trade debtors, trade creditors, salaries, wages, rentals, etc.) also cannot be eroded by inflation and hyperinflation because inflation and hyperinflation have no effect on the real value of non–monetary items – both variable and constant real value non–monetary items. However, the very erosive stable measuring unit assumption (i.e., the HCA model or financial capital maintenance in nominal monetary units during inflation and hyperinflation) erodes the constant real non–monetary value of constant items not maintained constant during inflation and hyperinflation, e.g., trade debtors, trade creditors, salaries, wages, rentals, that portion of shareholder´s equity never maintained constant by the real value of net assets under HCA, all other non–monetary payables and receivables, etc., at a rate equal to the annual rate of inflation or hyperinflation.

Severe hyperinflation is the final stage of a devastating hyperinflationary spiral only in the local currency monetary unit with a continuously super–increasing rate of hyperinflation reaching millions per cent per annum when exchangeability of the hyperinflationary monetary unit becomes limited to very few or just one single relatively stable foreign currency.

Hyperinflation and severe hyperinflation need exchangeability with at least on foreign currency. With no exchangeability there is no local currency and no hyperinflation, in this case, no severe hyperinflation.

The real value of the entire money supply can be eliminated like in the case of the Zimbabwe Dollar on 20 November, 2008, not as a result of hyperinflation, but as a result of a monetary meltdown after a period of severe hyperinflation.

As of 14 November 2008, Zimbabwe’s annual inflation rate was 89.7 Sextillion per cent (89,700,000,000,000,000,000,000%).

Hanke 2010

In Zimbabwe the Zimbabwe Dollar finally had exchangeability only with the British Pound via the Old Mutual Implied Rate (OMIR) as derived from continued trade in Old Mutual shares on the Zimbabwe Stock Exchange even during severe hyperinflation. A monetary meltdown took place in Zimbabwe on 20 November, 2008 when the ZSE was closed by government regulation and the Zimbabwe Dollar stopped having exchangeability with the British Pound (the last foreign currency it had exchangeability with) via the OMIR.

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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