Does existing debt at a fixed rate in local currency really just functionally disappear? What about variable rate loans – do rates get up in the 100s or 1000s? Do all new lending activities cease, or are they issued in a different currency? Do credit cards stop working? And how is all this money entering the economy? If, in the example of bolivia, the bolivar is losing 99% of its value in less than a year for multiple years, then are employers re-calibrating salaries like every week?
In: Economics
For those who hold debt at fixed rates, yes, in a hyperinflationary environment, the debt is functionally depreciated to insignificance. But new debt in the local currency is incredibly hard to come by, and households and businesses start to hoard and basically get rid of cash as fast as they can. Governments almost inevitably target exporting companies and force them to convert their foreign currency earnings into domestic currency at some unrealistic exchange rate. This essentially kills the goose that lays the golden eggs.
In this kind of environment any kind of business that relies on anything but the shortest supply chain cannot do business. Their suppliers cannot hold on to prices because the raw material supplier is raising prices. So all forms of sophisticated industry (essentially the higher value add ones) perform badly leaving only really simple ones like mining, farming and basic food production.
Of course, the next page will be imposing capital controls, price controls and subsidies (to placate the masses). Favored parts of the government (ie the ones holding the guns) will be given access to privileged prices. Rationing occurs to prevent hoarding etc. This is, of course, immensely destructive to private enterprise. Everyone wants to work for the government (who can print money). Private firms simply go out of business because they can’t adjust prices fast enough to cover increasing wage demands. The only employers left will be ones that the government supports.
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