Mises Circle Greenville 2010

 Taxes  Borrow (implies a tax, inflation, or default later)  Inflate (seigniorage; tax on money holdings) 2

 Price of a newspaper in Germany, : January May October February September ,000 October 1, ,000 October 15 20,000 October 29 1,000,000 November 9 15,000,000 November 17 70,000,000 3 DatePrice in marks Source: Mankiw, Macroeconomics, 5 th ed., pp

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5 Source: Mankiw, Principles of Macroeconomics, 3 rd ed. (2004), instructor ancillaries

 In 1923, highest denomination was 100 trillion marks  Fiscal reform ended the inflation  At the end of 1923, the number of government employees was cut by a third  A new central bank was created  This demonstrated a commitment to not printing money 6 Source: Mankiw, Macroeconomics, 5 th ed., pp

 Reached 1426% 7 Source: Mankiw, Principles of Macroeconomics, 3 rd ed. (2004), instructor ancillaries

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 1946 hyperinflation was even worse  Resulted in largest denomination note ever issued by any country: 9 Image source: Tom Chao’s Paper Money Gallery: Million Bil-Pengo (1946): 100,000,000,000,000,000 units

 Prices doubled every hours  41.9 quadrillion percent/month  When replaced by the forint in August, 1946, 400 octillion pengo became 1 forint. 10 Investmentwatchblog.com; image source: Tom Chao’s Paper Money Gallery:

 By the end of the 1980s, inflation was about 200 percent a month.  In December 1989, peak annualized inflation was 4,923.3 percent investmentwatchblog.com

 1990: Move toward markets/privatization  In April 1991, Argentina linked its currency to the dollar (a “currency board”).  From , Argentina’s economy grew at a rate of about 7.7 percent a year.  1989: Gov’t expenditure was 35.6% of GDP  1995: Gov’t expenditure was 27% of GDP 13 investmentwatchblog.com

 “Growth” was another inflationary boom, however.  Argentina’s money supply rose by 60 percent a year from  Money creation abruptly stopped in 1998, triggering a corrective recession. 14

 The money supply contracted from  Banking confidence fell, and there was a run on Argentine banks.  Bank withdrawals were restricted, while the peso devalued.  Prices rose significantly in 2002 (not hyperinflation this time) 15

16 Note: Annual Variation in the Consumer Price Index (IPC) and the Producer Price Index (IPIM) Source: Instituto Nacional de Estadísticas y Censos and LatinFocus calculations

 Estimates at the beginning of 2010 indicated that Argentinian inflation in 2009 was the 3 rd highest inflation worldwide (after the Congo and Venezuela).  Actual inflation may be much higher than official reports—maybe percent in %2017:10:00.0/ htm 17

 In 1994, inflation reached 2,075.8%, so that a cruziero from 1967 had become worth less than one trillionth of a U.S. cent.  The real was adopted: 1 new real was worth 2,750,000,000,000,000,000 old (1942) reals. 18 investmentwatchblog.com

 “In 1986, President José Sarney of Brazil… froze prices, controlled wages, and lopped three zeroes off the Brazilian currency. …Higher prices were quickly replaced by other problems. Severe shortages of daily necessities such as eggs, meat, and milk developed. Black markets quickly filled the vacuum, resulting in higher prices that didn’t show up in official inflation figures.” 19 nflation-lessons-from-south-america/

 Hyperinflation from  Two currency reforms: kwanza to novo kwanza back to kwanza.  Overall impact to date: 1 current kwanza = 1,000,000,000 old kwanza. 20

 From , Yugoslavia had an average annual inflation rate of 76%  Only Zaire and Brazil had a higher inflation rate.  In December 1990, the Serbian parliament ordered the Serbian National Bank (a regional central bank) to issue large amounts of credits to friends of Slobodan Milosevic. 21 Source: Steve Hanke in April 28, 1999 Wall Street Journal

 This amounted to more than half the planned increase in the money supply for all of Yugoslavia in 1991  Croatia and Slovenia broke away  In January 1992, hyperinflation began 22 Source: Steve Hanke in April 28, 1999 Wall Street Journal

 In January 1994, the official monthly inflation rate reached 313 million percent  This was the second-highest monthly rate (after Hungary in 1946)  …and the second-longest (after the Soviet hyperinflation of the early 1920s)  People spent their time trying to exchange dinars for marks or dollars on the black market 23 Source: Steve Hanke in April 28, 1999 Wall Street Journal

 The Yugoslav mint was producing 900,000 bank notes a month, in denominations of up to 500 billion dinars 24 Source: Steve Hanke in April 28, 1999 Wall Street Journal; image from National Bank of Serbia

 1 novi dinar in 1994 = 1,300,000,000,000,000,000,000,000,000 pre-1990 dinars  On January 6, 1994, the government gave up and declared the German mark legal tender  Tying a “superdinar” to the mark reduced inflation 25 Source: Steve Hanke in April 28, 1999 Wall Street Journal

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“Mr. Mugabe's government has printed trillions of new Zimbabwean dollars to keep ministries functioning and to shield the salaries of key supporters...” (NYT, May 2006) November 2008 estimates put Zimbabwe's annual inflation rate at 89.7 sextillion (10 21 ) percent. ( Prices doubled every 24.7 hours. 27 Photo from BBC News, m (

December 2008: inflation at 6.5 quindecillion novemdecillion percent (65 followed by 107 zeros). Late January 2009: citizens allowed to conduct business in any currency 28 Photo from BBC News, 36.stm

 Bolivia ( ) – 20,000% peak  Chile ( ) – peaked at 1,200%  Greece ( ) – 8.5 billion % inflation/month  Russia ( ) – 2,520% in  Ukraine ( ) – 1,400% a month 29

“When people talk of a ‘price level,’ they have in mind the image of a level of a liquid which goes up or down according to the increase or decrease in its quantity, but which, like a liquid in a tank, always rises evenly. 30 Ludwig von Mises

“But with prices, there is no such thing as a ‘level.’ Prices do not change to the same extent at the same time. There are always prices that are changing more rapidly, rising or falling more rapidly than other prices.” 31 Ludwig von Mises

 Where the new money enters the economy is important (“Cantillon Effects”).  If the government spends the new money first, then the things government buys will see price increases first  Who gains? People who sell to the government  Who loses? People who are in competition with the government, who buy what it buys 32

 Unexpectedly high inflation is redistributive  With fixed interest rates, lenders lose, as purchasing power of repayment is lower than was anticipated.  Borrowers gain  Unexpectedly low inflation redistributes as well  Lenders gain, borrowers lose 33

 Inflation can create business cycles  Pushing interest rates down can create the impression that long-term projects are more profitable  People invest in those long-term projects by buying capital for them  When the interest rate comes back up from its artificially low levels, the capital investments lose value  Stock prices drop, people are laid off. 34

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 Commodity standards  Price controls  Hidden inflation—monetary price increases but is not measured  Black market transactions  Hidden quality deterioration  Repressed inflation—shortages and queues develop 38

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