What is inflation and what does it mean when people say the currency in Venezuela is worthless?
In: Economics
Inflation – from what I understand, is when there’s so much currency (fake or more bills printed) that actually lessens the overall value of money as it’s not a scarcity. Say, in theory, people think if we have poor people, why not just print more money?
Because more money makes prices skyrocket as it doesn’t hold its intended value any more.
i will give the simplest example. let’s say the government printed money, now everyone is rich, but wait if everyone is rich then money doesn’t have the same value it used ti have before.
Inflation itself is just the term to describe the worth of money decreases over time. Contrary to that we have deflation which means the value increases.
Inflation can have many reasons and is induced by the EU and US to stimulate the economy at a low rate.
This can be done by giving out new money into the economy. There is a fixed amount of value in any country and a fixed amount of money, so basically you could see how much worth something is by calculating what part it is of the economy and then taking that part of the money.
For example, the whole economy of Banania is 100 Bananas and there is a total of 2000 Banana Dollars. 1 Banana is 1/100 of the whole economy and 1/100 of 2000 Banana Dollars is 20, so one Banana is worth 20 Banana Dollars in Banania.
Now the Government decides to print 2000 more Banana Dollars. The Bana is still 1/100 of the economy, but now the Banana is worth 40 Banana Dollars. You now need double the money to buy a Banana.
In Venezuela something similar happened, in addition, inflation causes more inflation by other factors, like people wanting to spend their money now instead of waiting for it to become worth less, which makes money even less valuable since there are more buyers for the same good. These extreme cases are called Hyperinflation, they spiral out of control and can devalue money to a fraction of it’s worth in months.
So, imagine you are making juice using a can of frozen concentrate. You put in the tin of juice mix, and 3 tins worth of water. That juice you just made is the economy. The concentrate is the actual value of your economy, and the water you added is the dollars you have printed to represent that value.
Now imagine you need more juice… so you add more water. Sure, you have more juice, but it’s watered down; it’s less good. Same thing when a country needs to pay a debt so it prints more money, it waters down how much that money is actually worth because the underlying value didn’t change, just how thin it was spread out.
That’s basically what happens when a country’s currency holds no value. Either the country has printed more money than it is worth, or the value of that country has dropped (because trade partners see them as risky to trade with for a variety of reasons).
Inflation is generally when money is worth less than what it was. Almost all economies inflate. Hence why $1 back in the day was worth a hundred today. In the U.S. our average inflation per year has been around 3%. Meaning every year our dollar is worth 2-3% less than it was the previous year. Most government jobs see a raise of 4-6% per year to compensate for increased inflation as well as increased experience in that job.
The reason inflation exists is that more money enters circulation than the money that leaves circulation. If there is only $100 in a town of 10 people, each dollar would be worth a lot. You would have to pay pennies and your entire livelihood would be between $2-5 with one person most likely holding onto $30-50. If that town were to print more money it wouldn’t necessarily mean anyone would be getting paid more, it would just devalue their money. There would still be 10 people in a town fighting to survive. $2-5 would just be $20,000-50,000 with one person who has $300,000-500,000.
When you get to other countries they tend to have a value they control through trading. This used to be tracked in gold. Every country could make whatever currency with whatever value but their amount was determined by the amount of gold they had. If they wanted to increase their country’s value they would trade something to another country to get more gold. These days it is done with GDP, exports and Loans mostly.
It doesn’t really work that way anymore but I like explaining it that way because it’s easier to explain as. Venezuela has a lot of currency, but very little gold. So other countries don’t respect their currency so it is devalued to the point that if you want to order something that is $50 in the U.S. it would require about $500 in Venezuelan currency. That isn’t the most inflated currency in the world, but Venezuela is often a hot topic in politics because of their current governing style.
Inflation isn’t always a bad thing though. If countries compensates correctly, you can inflate all you want and still have strong economies. Sweden for example has more millionaires and billionaires per capita than most countries, including the U.S. (using U.S. currency as an indicator) and their currency is worth about an 8th of the U.S. Dollar. Meaning if you want $100 in the U.S. you would need to earn $800 in Sweden to have $100 in the U.S. Which seems like a lot more work, yet Swedish people get paid significantly hire in the middle income area than those in the U.S.
I know this was a longer text, but you asked two questions, explaining inflation alone wasn’t enough in my opinion.
Inflation is a general increase in the level of prices in an economy.
Usually, this is primarily driven by there being too many dollars circulating in the economy. The money supply, both by direct government action and the lending of private organizations and individuals, can change. If the amount of stuff being made and sold doesn’t change but the number of dollars people have to spend does, prices will rise (same if the number of dollars grows much faster than the amount of stuff produced).
Extreme inflation, in the form seen in Venezuela, happens when governments openly turn to the printing presses to finance their spending. When a government says it will spend a ton by printing new money, it usually means a ton of new dollars (or bolivars) get circulated into the economy with basically no change in the amount of stuff actually being made. Hence, prices increase. If this is standard policy, prices start to grow very fast. Once this happens, it becomes very hard to slow down because people expect the money supply to keep increasing very rapidly and will raise prices in anticipation.
In Venezuela’s case, at the peak of its hyperinflation, $65,000 at the end of the year would only buy as much as $1 did at the start.
As the currency loses value, savings in that currency also lose value.
Hard assets retain their value better. Gold is the main standard.
Inflation is a hidden tax on savings. It hurts people.
Latest Answers