Apparently, every time a currency falls victim to hyper inflation, sooner or later the country is gonna introduce a new currency to solve the problem.
But how does that help? If let’s say the us dollar lost 90% of it’s value every day, and you introduced a new currency, one of which is equal to 5 us dollars, wouldn’t that new currency, as it’s value is bound to the dollar, instantly lose 90% of it’s value every day as well?
In: 712
So to understand inflation we have to understand a fundamental formula in macro-economics:
*MV = PT*
The letters are simple
*M* is the amount of money there is. That is the total amount anyone has at any moment.
*V* is the velocity of the money, or how many times per second its spent. If I buy a lemonade off you for $1 dollar, and then you spend that $1 buying a lemon 30 minutes later, the velocity of that dollar was $2/hour.
*P* is the price of things, which increases with inflation.
*T* is how many things were sold. And we generally measure this as the GDP (Gross domestic production, or how much was produced) of a country
In short the total times we spend all the money must equal the amount of times we charged for something. That makes sense.
Now what this formula means is that when one of the values changes, the others must change to adapt. Lets go with a simple scenario: there’s now more people alive today than yesterday. Every person spends about the same amount of money (because they all need to eat, and houses to sleep at, etc. etc.), so more people means that *T* is larger. That means that either *M* to increase (we print more money to spread around all the extra people, well really we allow people to borrow more easily with lower interest rates), *V* needs to increase (people have less savings and start living more paycheck to paycheck as basically there’s more competition in everything), or P has to decrease (we make things cheaper so that people can keep affording it, this is deflation).
Thing is we hate deflation. Deflation means we need to lower wages, which happens as companies closing, people getting fired, and businesses suddenly not being able to work (so people lose luxuries or even services that we considered worth it, basically we don’t have enough services to go around with everyone, so we just stop doing it). So countries generally try to either print money or decrease loan interests to keep things going. And because it’s really hard to get it perfectly, countries risk it and make a bit of extra money to go into inflation (which isn’t too bad as long as you get a little).
But now imagine that there is a *huge* amount of money out there, way too much, but its mostly held by rich elites who simply have it not moving. This means that *V* is very low, but *M* is very high. Now imagine that those rich people die and their children inherit the money, and they begin spending it on buying all sorts of stuff for themselves. This increases *V* a lot. Countries would try to reduce *M* here (with basically really high interest rates to lower the amount of loans out there) but not every country can (if you printed the money it’s out). So the result is that either *P* and/or *T* needs to increase, a lot.
Thing is a country may not be able to increase *P* enough, there’s a limit to how much you can produce. At some point the limit is you need to educate people or even make new children and wait for them to grow. So the only solution is to increase *P* which is when you get *a lot* of inflation.
Little aside here, what most people don’t talk is that generally this happens because the country wanted to make it’s elites richer, even though they weren’t generating any value. At some point the economy collapses, you can’t just make up numbers like that.
So back to our story. *P* increases a lot, which means that people need to spend more of their money, which results in them having less savings and *V* increasing a lot. This means that *P* has to increase even more. At this point the rich people are starting to lose money, so they try to invest, you have to spend money to make money, but this only makes the issue worse. At this point the government needs to do something. They can’t increase the GDP fast enough, and they can’t tell people to stop buying food or the things they need. So the only thing they can do is to print even more money to pay for everything they need to function now. This increases prices more and means that inflation is even worse. If the government doesn’t print more money, there won’t be enough money to buy things and people will start dying.
So at some point you have to admit that the economy is lost, and you drop it. There’s just too much money and you need to decrease it, a lot, and there’s no easy way. So this is when governments simply start a new economy: they make a new currency, and this currency has a lot less money around. Because the amount of money isn’t too much, this means that the government can better regulate it, and it won’t go bad.
Governments try to prevent this by allowing loans to make money. If you lend me $2, and I give you an IOU, you can use that IOU as if it were worth $2, and that means there’s now $4 in total between us. Now if we allow some interest that extra money sticks around. What happens is that we all owe each other something, and societies work when we all are indebted to each other and work towards helping each other.
There’s another lever you can use to reduce *V*: taxes. By putting taxes on money that is not being moved around or putting taxes on money that is moved around you could regulate how fast it moves. If you buy $2 worth lemonade from me, and then I spend that $2 after one hour, that’s $4/hr, but if there’s ludicrous 50% tax on lemonade, when you buy $2, I get $1, I spend it one hour later and that’s now $3/hr. But most people with money (which get a lot of say on policy) do not like this at all.
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