Introduction. The General Assembly. Controlling hyperinflation s impact on the poor. Student Officer: JiHye Ryu

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1 3Forum: Issue: The General Assembly Controlling hyperinflation s impact on the poor Student Officer: JiHye Ryu Position: President Introduction Hyperinflation is when the prices of most goods and services skyrocket, usually more than 50% a month. It usually starts when a country s Federal government begins printing money to pay for fiscal spending. As the money supply increases, prices creep up as in regular inflation. However, instead of tightening the money supply to lower inflation, the government keeps printing more money to pay for spending. Once consumers realize what is happening, they expect inflation, which causes them to buy more now to avoid paying a higher price later. When this accelerates, it artificially boosts demand out of control, which causes inflation to spiral into hyperinflation. There are two primary causes of hyperinflation, and both of them are from our own actions. The first cause is when the market (consumers and other users of a currency) begin to lose faith in a country s currency. Here, it is important to highlight that currency is only as good as the government issuing the currency, and if consumers believe that the government won t honor the cash it is issuing, then nobody would want to hold the cash. The second cause of hyperinflation is caused by the government issuing the currency. As a government prints more money, the value of that money goes down. If a government prints more money to pay its own debts, it is starting the inflation cycle, which is extremely difficult to stop. In most cases of hyperinflation, the lack of a reliable system of exchange leads to a breakdown in society. For example, the two countries that are known for hyperinflation suffering are Germany and Zimbabwe. In Germany, The law-abiding country crumbled into petty thievery. People bought things they didn t need and used them to barter. Cocaine was the fashionable drug. In Zimbabwe, Inflation is making it impossible for families to afford basic commodities they need to live day by day. Inflation is obliging many Zimbabweans to make a living by means that are sometimes less than reputable. Research Report Page 1! of 5!

2 Definition of Key Terms Hyperinflation An extremely rapid period of inflation, usually caused by a rapid increase in the money supply. Usually due to unrestrained printing of fiat currency. Inflation A general increase in prices and fall in the purchasing value of money. Price The amount of money expected, required, or given in payment for something. Currency A generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Market A medium that allows buyers and sellers of a specific good or service to interact in order to facilitate an exchange. Inflation rate The percentage increase in the price of goods and services, usually annually. Fiscal policy Government spending policies that influence macroeconomic conditions. Through fiscal policy, regulators attempt to improve unemployment rates, control inflation, stabilise business cycles, etc. Supply A fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. Demand How many goods and services are bought at various prices during a certain period of time. Consumer s need or desire to own the product or experience the service. Research Report Page 2! of 5!

3 History/Key Issues * Egypt 276 AD AD 1 million percent inflation in 58 years. * France Assignats were created as notes by the government. Eventually became worthless * United States % inflation per month * United States Total hyperinflation of 1200 to 1. (Confederate Civil War) * Austria Inflation in one year reached 1426% * Germany Total hyperinflation to 1 * Philippines Conquering Japanese army issued fiat currency which became worthless * Greece Total hyperinflation to 1 * Hungary Total hyperinflation to1(russian Marxists) * China Total hyperinflation to 1 * Brazil Total hyperinflation of to 1 * Mexico Total hyperinflation of 10000% * Bolivia New currency replaced the old currency at a rate of 1 million to one * Argentina By the end the hyperinflation currency exchanged at 100 billion to one * Yugoslavia Hyperinflation currency exchanged at to 1 * Poland By the end the hyperinflation currency exchanged at to one * Zaire By the end hyperinflation currency exchanged at to one * Angola By the end hyperinflation currency exchanged at 1 Billion to one * Bosnia and Herzegovina Hyperinflation at the rate of to 1 * Belarus By the end the hyperinflation currency exchanged at 1 million to one * Zimbabwe The final result was a total elimination of the currency Research Report Page 3! of 5!

4 Possible Solutions Monetary Policy In the United Kingdom and the United States, monetary policy is the most important tool for maintaining low inflation. The first step is to try and predict future inflation. If inflation is foreseen, the government will increase interest rates. Increased interest rates will help reduce the growth of Aggregate Demand in the economy. The slower growth will then lead to lower inflation. Supply Side Policies Supply side policies aim to increase long term competitiveness and productivity. For example, privatisation and deregulation were hoped to make firms more productive. Therefore, in the long run supply side policies can help reduce inflationary pressures. Fiscal Policy Fiscal policy involves the government changing tax and spending levels in order to influence the level of Aggregate Demand. To reduce inflationary pressures the government can increase tax and reduce government spending. Exchange Rate Policy Exchange rate can be used as a means to control inflation. By keeping the value of a currency high, it would help reduce inflationary pressures. This solution will go with increasing interest rates. Wage Control Wage growth is a key factor in determining inflation. If wages increase quickly it will cause hyperinflation. Although effective, the effort to enforce limiting wage growth is difficult. Research Report Page 4! of 5!

5 Bibliography "What Is Hyperinflation?" InflationData.com. Web. 11 Jan < articles/hyperinflation/> "Investopedia - Educating the World about Finance." Investopedia. Web. 11 Jan < "Hyperinflation." : The Concise Encyclopedia of Economics. Web. 11 Jan < "Brazil s Economic Solution to Hyperinflation." Squirrelers. Web. 12 Jan < squirrelers.com/2011/01/29/brazils-economic-solution-to-hyperinflation/>. "The Inflation Solution." The Economist. The Economist Newspaper, 13 Mar Web. 12 Jan < "How Can We End Hyper-inflation?" The Zimbabwean. 4 Feb Web. 12 Jan < "What Is the Relationship between Inflation and Interest Rates?" Investopedia. 21 June Web. 12 Jan < "Policies To Reduce Inflation - Economics Help." Economics Help. 12 Nov Web. 12 Jan < Research Report Page 5! of 5!