Hyperinflation question

Funster you said

"When a country experiences hyperinflation such as Germany in the 1920/30s I don't quite understand how that affected savers.

In this example historybooks tell us that it was the middle class and the elderly who had saved all their lives that suffered greatly."

"Basically the answer then is that, in the real world, the banks, government and other institutions would, due to their own nervousness, probably be expected to conspire against the common saver in some such way that would have a contra or lagging effect to the predominant trend of hyperinflation."

No

Basically the answer is

It mainly had to do with the EFFECTS OF INFLATION, not a lag or contra trend or a conspiracy

It was the savers' original saved principal which was mainly affected (and therefore, the middle class and the elderly who had saved all their lives that were most aversely affected and suffered greatly.

If you had $1000 saved today and someone else had $1,000,000

saved today. Then, if by next week prices had gone up %1000 which would be 10 times,

your $1000 (1000/10 )would buy $100 worth of goods and services at todays prices. You basically lost $900.

The other person's $1,000,000 (1,000,000/10) would buy $100,000 worth of goods and services at todays prices.
They lost $900,000.

A $900 loss is bad a $900,000 loss is generally devastating!

It was the original (saved) principal which was mainly affected by the inflation after the money had been saved.

I ask, "Who was hurt worse when inflation took off. The person with $1000 saved or the person with $1,000,000 saved?"

It mainly had to do with the EFFECTS OF INFLATION, not a lag or contra trend or a conspiracy.
 
Quote from Diode:

Scientist,

You might want to brush up on your German history before you tell the family story next time. German hyperinflation occurred during the period July 1922 to November 1923. Hitler had nothing to do with it; he came to power ten years later.
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Yeah I was about to reply that too :) It is also interesting that a Multi-Million Dm family (in the time where you bought a car for 800dm) did not instantly move the money into commodities and get the fuck out of germany :)

ah well, we can always use some more great fictionists :)

Tiki
 
Quote from Funster:


When a country experiences hyperinflation such as Germany in the 1920/30s I don't quite understand how that affected savers.

In this example historybooks tell us that it was the middle class and the elderly who had saved all their lives that suffered greatly.

Purchasing power rapidly diminished with (e.g.) a cup of coffee increasing in cost 1000% in a week.

Now surely if inflation is that high then the interest rates on savings will also be high. I am assuming here of course that interest rates are free floating and not controlled in the way the fed controls them today. So surely this should not affect the pots that people have saved too much as they too will be rising in line with the hyperinflation???

Thanks

Funster

:)
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Simple - the interest rate increased after you placed your money in the savings deposit (e.g. CD, t-bill, govt bond etc). You would invest at a 1000% interest rate, but by the time you got your money back, the money supply could have increased 1000 fold and your money - despite it being 11 times more in nominal terms - would now be worthless in real terms.

Floating rate instant access savings accounts either did not exist for average joes, or adjusted their rates with a delayed effect. If rates are 1000% per week, and inflation then goes to 2000% per week, and it takes 1 week for the rates on your savings to change, then you have lost half your money in a week.

It is not necessarily a conspiracy against the average guy in the street - it is simply impossible to avoid the lags in the system, especially in an age when banking was done with pens and paper.

This book is good for understanding hyperinflation:

http://www.amazon.com/exec/obidos/t...f=sr_1_2/104-3077425-2584724?v=glance&s=books
 
"If you had $1000 saved today and someone else had $1,000,000

saved today. Then, if by next week prices had gone up %1000 which would be 10 times,

your $1000 (1000/10 )would buy $100 worth of goods and services at todays prices. You basically lost $900.

The other person's $1,000,000 (1,000,000/10) would buy $100,000 worth of goods and services at todays prices.
They lost $900,000.

A $900 loss is bad a $900,000 loss is generally devastating!"



I hear what you are saying but surely if it were not for some artificial mechanism such as government interference or onerous banking regulations it is also likely that the interest rate on that $1m of savings would also increase just as fast as the cost of the goods and services, thus the $1m would become $10m or so in the same space of time?

Isn't that why generally speaking the riskier the asset the higher the interest rate you get (a la bonds and currencies) ?
 
That's only true if you have an instantaneously adjusting floating market rate of interest on your savings.

In reality, your rate would be way below the market (for an average joe), and would adjust with a time delay vs market rates.

If you wanted to borrow, you would pay way above the market. This isn't a "conspiracy", it is just reflective of the extreme volatility and uncertainty regarding inflation and interest rates. During Sep 11th, bid offer spreads were very large in stocks, due to the uncertainty. During the hyperinflation of Weimar Germany, bid offer spreads were huge on savings and borrowings, due to inflation uncertainty. It's conceivable you might save at 1000% and borrow at 10,000%. Even wholesale, the spreads were probably huge.
 
OK thanks for those explanations and putting it in terms of bids & offers makes it quite clear.

You have also introduced a new variable - money supply.

So basically what you are saying is that even if you have an interest rate keeping up with the inflation rate, the fact that money supply is increased drastically will make that currency worth much less on the world stage. A side effect of this might be that goods that are imported (most of them these days of course!) would be even more expensive than the hyperinflation in itself would directly cause. Is that about right?

Sorry if that doesnt make sense I am also trading at the same time !

:)
 
... from reading some accounts of both the Weimar experience (which was before Hitler as Diode pointed out) and the more recent Yugoslavia breakup experience, I think one overlooked factor is that with hyperinflation, the effectiveness of business planning breaks down.

This means that an economy's ability to produce is necessarily reduced.

Even if you kept money supply constant, the same pool of money being used to price a diminished pool of goods & services will result in further inflation, much less a situation where the pool of money is growing.

Accounts of Yugoslavia tell about how the economy just slowly broke down and incentives for people to maintain infrastructure just stopped. Mail become erratic, power becomes erratic etc.

At that point, forget about how many dollars you hold in your hands - its what you can buy with it that counts. If society produces far fewer things than before and the number of people remain the same - you can be sure that the average quality of life is going to go down.
 
Quote from TheStudent:


...
Accounts of Yugoslavia tell about how the economy just slowly broke down and incentives for people to maintain infrastructure just stopped. Mail become erratic, power becomes erratic etc.

At that point, forget about how many dollars you hold in your hands - its what you can buy with it that counts. If society produces far fewer things than before and the number of people remain the same - you can be sure that the average quality of life is going to go down.
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Don't forget about Turkey which is even more recent. Afghanistan and Iraq got USD and then other newer currencies as part of their "help" after having many valuables blown to bits. :D

External debt in foreign currency is a killer when inflation rises, as shows Turkey, Argentina, Brazil etc. The asian countries have wisely converted debts into local currencies. IMF "means well" most times, but only provides a sorely incomplete solution for economic woes. Privatisation without proper government and market reforms is futile and further excaberates the problems, as these examples goes to show.
 
Quote from Diode:

Scientist,

You might want to brush up on your German history before you tell the family story next time. German hyperinflation occurred during the period July 1922 to November 1923. Hitler had nothing to do with it; he came to power ten years later.
More...
Hey Diode,

Ouch! Embarrassing, but you're right. I really must have gotten the hyperinflation part mixed up a bit. Admitted, I haven't yet studied my family history enough, and worse even, history altogether was my worst subject at school - I hated it. Today, I'm interested in History and I wish I'd taken in a bit more of it in at school... :(

All the rest of the story is for the most part true though (and there's lots more left out), guess I gotta figure what actually brought the real downfall of the dynasty. Perhaps it really was mainly the nazi regime disowning people, particularly Jewish.

Thanks for the clarification, I will shut up now! :p

Ever seen a letter franked with 40 Billion Marks? http://www.stamporama.com/rambler/show.php?sd=roy&a=ginfla
 
.. thanks for the input. It's good to hear from someone who has lived through hyperinflation.

the nearest I ever came to it was holidaying in turkey 1998 and watching the USD-Lira rate go up and up every day at the bank. it was so disruptive.
 
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