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
It is all about supply and demand. Cost/value is related to demand. the greater the supply, the less the demand. If a country prints money to solve its problems it is creating supply which lessens demand. On the other hand actual physical items will have a finite supply. if the demand for physical goods is greater than the demand for money then the “cost” of those physical goods will increase. a new currency may help things but it depends on how it is “backed”. For instance some currencies could be exchanged for gold, so you would know they always were based on some “fixed” value. But those would also fluctuate based on the belief that the government could actually make the trades it has promised, and if people don’t believe it, the value drops. The US currency used to be backed by gold by that changed last century. Now it is only backed by “belief”. The same applies to everything. Value is created and destroyed by belief in a thing.
it doesn’t actually help. they just want you to think it does, to increase trust in the government again.
it theoretically decreases it if people do not manage to change their money into the new one, or if they tax it or make the exchange rate bad
Let’s say a bank has 5000 gold pieces in its vault. Let’s say the price of gold is very much set in stone and is the “gold standard”. Everybody knows the value of a gold piece. It is exactly 1 gold piece.
But gold is heavy. So instead of trading in gold and having everyone carry around heavy pouches filled with gold, the bank makes these paper bills. Let’s call them Oogie Boogies (whatever). So how much is an Oogie Boogie worth, you might ask. Well the bank made 50,000 Oogie Boogie bills in total, so 10 Oogie Boogie is worth 1 gold piece. Simple. Everybody’s happy. Business thrives.
But one day, a well running business (that’s a business that runs wells), comes to the bank to make a particularly big withdrawal. Oh no, the bank doesn’t have anymore Oogie Boogie bills. So they quickly make some more. Pfew, crisis averted. But the following day, the same happens. And the day after and the day after that as well. But now the bank has created a total of 500,000 Oogie Boogie bills, while they still have the same 5000 gold pieces in their vault. That means that now 100 Oogie Boogies is worth 1 gold piece. Oh no, inflation!! Let’s quickly make some more bills to compensate! And by the end of the following week, it took 5000 Oogie Boogies to get to a valid of 1 gold piece.
So the bank said, scratch that. Oogie Boogie bills are better used as toilet paper. Let’s make some new bills. Let’s only make 5000 this time and we’ll call them Binga Bonga Bills. They sound cooler as well. One Binga Bonga Bill is worth one gold piece, so they’re much more valuable. Inflation solved!
Of course, it’s much more complex than this and there’s a lot more at play, which i don’t understand. But I think 5 year old me would understand this.
It does not. A new currency is only as a logistic solution (as the bigger the number, the more new money you have to print anyway, and the more space it takes otherwise, phisically) and a psychological one (smaller numbers are easier to handle and visualize. Besides, if you have to devaluate as a shock measure to stop inflation from rising even more, it is far more politically friendly to create a new currency at 1:x ratio, than lowering salaries, if its legal at all, or stagnating them but not prices which is mentally draining)
If you want to stop inflation, you need to solve the underlying cause and generally when there are large amounts of it, it is caused by devaluation, which usually arises from money printing, that by itself is used to water down debts and finance public spending. Most countries solved that already, mostly, by independizing the central bank
Source: Im argentinian, I was born at the tail of hyperinflation and im living hyperinflation currently
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.
The reason it’s so hard to learn about inflation is because too many people insist that inflation is cause by something other than printing money. Countries printing money is like stores handing out free gift cards. If a few gift cards were handed out, a profitable store would be able to allow everyone to redeem the gift cards.
Imagine if your local corner store handed out 1 trillion dollars in gift cards. There probably isn’t more than $30,000 worth of stuff in the store and there is no possible way everyone holding gift cards can redeem all of them. This is what inflation is.
Changing currencies is a way of stealing or denying a group of people from redeeming gift cards. Generally, government tries to steal from the richest group. Exchanging currencies would have rules. Let’s say the local corner store changes names and ownership. They allow everyone to exchange up to $100 worth of gift cards over to the new store’s gift cards. Anyone holding more than that is screwed. All the poor people who have little or nothing don’t notice a significant change. The rich are a minority and lose everything. By exchanging currencies, a government steals from everyone who has any meaningful amount of money, and avoids an overthrow of government.
When this happens, no rich people will invest into the country for the next few decades. The country loses their ability to borrow money from any other country.
Changing currencies is a way to default on the money held by all the rich people. That has nothing to do with inflation. IF the country, after defaulting on the prior obligations decides top stop printing more of the new currency, it will actually stop inflation and they will be also freed from a lot of debt. If they continue to print money unconstrained, and the next currency will undergo similar inflation.
Replacing a hyper inflated currency with a new currency doesn’t fix anything. Hyperinflation is a symptom of a bunch of different problems that, unless taken care of beforehand, will just result in hyperinflation of the new currency.
Now, that’s not to say there’s no value in replacing the currency. It can be a sort of reset button to bring down the numbers on the currency to a sensible level.
You have cause and effect reversed.
The country (with the hyper inflating currency) first has to stop the hyper inflation. Only if that is achieved, can they then redenominate their currency or issue new currency with an exchange rate for the old currency.
And no, I’m not aware of any examples where a country actually pegged a new currency’s value to that of a hyperinflated currency. Most likely they would have established that as the value to start, but not peg it, so in case the value of either currency changes then what changes is the exchange rate, not the value of the other currency.
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