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Over the decades the world economy and the economy of various countries such as Zimbabwe, Germany, and some other have faced economic hardship due to the prices increase. Prices for goods and services are persistently increasing due to the changes in demand for goods and services which results from the increased velocity of the country money supply. Most of the scholars and economists have critically examined hyper inflation, though, on some occasions, they have been challenged to leave the economic gaps. This study embarks on step by step analysis of the understanding of the concept of hyper inflation, its root causes, government approach on the issue, effects of hyper inflation on the economy, particularly the current situation in Zimbabwe. Moreover, we should critically analyze the problem and provide necessary solutions to the problem as suggested by economists. This will be highly instrumental to all the countries that face war or economic band wagon or those that will possibly face hyper inflation in the future.

In the field of economics, hyperinflation is often found to occur when a country experiences an ever accelerating and high unstoppable rate of economy inflation (Fergusson 32). The currency is found to lose its real value as the general prices of the goods and services increase. In most cases, economists have embedded hyperinflation to result from the increased money supply in the economy and at the same time the cost of good acquisition stiffly hiked up. Hyper inflation was defined by Philip Cagan in 1956 in his book Monetary Dynamic of Hyperinflation as a situation in which the general prices on the commodities increase by two digits monthly, for example 50% leading to a three digits general inflation rate by the end of the year. In most cases, the inflation rate under this situation is triggered by the increase in the printed money more than the amount of goods, available for consumption. Hyper inflation is currently experienced in Zimbabwe and after World War II German economy suffered it.

This research papers presents the fundamental analysis of the understanding of inflation, it presents a list of the root causes of hyperinflation, the base at which it happens and the reasons why it happens and the government approach whenever inflation strikes the economy, the costs and implication of hyperinflation to the society in general and to every single individual, and lastly it considers the economy. In most cases, it’s necessary to mention that Zimbabwe economy will serve as an example on the race to analyze the hyper inflation process. In addition to that, the paper will also critically examine the possible solutions and methods proposed by the economists in the process of solving hyper inflation problems.

Literature Review

Introduction

In this chapter the list of root causes of hyper inflation, how it happens and why, the government approach, the costs of hyper inflation to the society as a whole and then to the economy before handling the Zimbabwean case are presented.

The International Accounting Standard Board provides the list of root causes of hyperinflation in various countries. The first one is where the general population decides to retain their wealth in form of non monetary items rather than understanding that this will destabilize the foreign currency, as it will trigger high purchasing power, hence causing hyperinflation. Moreover, it appears when the prices are quoted on a currency that the general population regarded in terms of local monetary currency rather than foreign currency. In addition to that, sale and credit purchases, set at a price to compensate the credit period purchasing power even considering a short period of time, may cause the hyper inflation in the economy. Other factors found to induce hyper inflation include: wages, interest rates, among other price linked index. Lastly, the economy may be hit by cumulative inflation rate of over 100% for a period of three years, hence is termed as hyperinflation (Fischer, 49).

There are several causes of hyper inflation in the economy. The first cause is an excessive creation and printing of cash by the government that does not match the ever increasing goods and services in the country. The resultant effect is that the population holding the money competes for the limited goods and services that are available, leading to an increase in the prices of these commodities and hence, resulting in hyper inflation. The population is found to quickly utilize the available money which is received, so that the velocity of money in the country increases at a rate which, in turn, accelerates the general prices of the commodity.

Another cause of hyperinflation is an imbalance between the demand and supply of the money in the economy that influences the bank run, involving the loss of the confidence of currencies, deposited in the banks. In other words, money is bound to be saved at home. This leads to the fact that the government has inadequate finance for the budget. This deficit triggers the government to print more money which inevitably results in the increased velocity of money supply in the economy and thus the prices of the goods and services are generally accelerated by more than two digits, causing hyper inflation.

The third cause of inflation is the failure of the government attempt to impose strict monetary policies. It has been found that monetary policies, such as imposition of taxes on the goods, help to reduce the purchasing power of people as they have smaller sums to spend. If the government fears tax imposition in goods and services, the public will have a lot of money to spend on the goods, leading to price increase. This monetary inflation becomes later hyper inflation, as the authorities are unable to raise funds from the public through the taxes to finance the government debts, reduce the cost of living, and meet the necessary government expenses, such as the payment of employees’ salaries. The government can also use other monetary policies if it fears to impose high tax burden on its citizens, including issuance of monetary bonds and bills from the discount at a very low interest. Consequently, the resultant effects are reduction of the prices of goods and services.

Lastly, it has been found out that wars, mass hysteria, band wagon economy policies and other social brain problems that some dictatorial leaders face using trade sanctions cause hyper inflation, as the investors are driven away, the production of goods and services decline. However, the demand is rising, the government decides to print more money to finance the economy deficits and this inevitably causes high velocity of money in the economy, leading to the acceleration of prices on the goods and services. The citizens loose the confidence in the currency, leading to hyper inflations in several months. Unless the government takes the necessary steps to control their demand and supply of money in the economy through the use of effective monetary policies, the hyper inflation rate greatly influences the economic state of the society and the whole country.

The society, as a whole, can suffer from the hyper inflation rates if there is a competition for the goods and services, caused by the increased velocity of money. In most cases, the prices of the goods rises, which in turn triggers the cost of inflation to go up and hence, the less fortunate in the society end up starving as they cannot afford the most necessary goods and services. Moreover, the society pays more than what it can afford for the goods, a case noted to lower the wealth in society and hence it induces high poverty level. Moreover, the hyper inflation has been found to lower the level of savings in the society so that little financial resources are diverted to the investment projects, as it utilizes the saved money on daily consumption (Zambell, 67).

Considering the economy, hyper inflation was found to affect it adversely, for example in Zimbabwe, it has wiped out the high purchasing power of both public and private savings, leading to economy distortions, so that some of the investors guided by greed to hoard the real  assets available and decided to amass wealth from people. The result of this is the creation of investment trachoma, as the monetary base has already been distorted. Thus, it becomes difficult to free the country from the deficits and debts.

Another economic disaster is that the economy of the country becomes more indebted. This means that the long-term debts taken from the monetary fund’s organizations and even from the other developed countries continue to expand due to penalties and interests, eventually, destroying the relationship between the country and its neighbors. Other effects found in the economy are drastic reduction in the level of investors and unemployment level increase. The labor force in these countries is found to flee the country and migrate to the neighbors due to the high cost of living.

Main Body (Analysis, Data and Results)

Considering the hyper inflation rate in Zimbabwe as our case study, we can start by revealing that it was the first country in 21st century to face hyper inflation. The statistics from the reserve bank of Zimbabwe revealed that in 2007 the inflation rate in the country hit 50% per month, meaning it was expected to have hyper inflation by 12875% per annum. Since then, the inflation rate has soared up (Guilar, 109).

Until January 2008, when the Hanke hyper inflation index of Zimbabwe (HHIZ) used the new metric device to measure it and was found by  November14th, it would have reached 89.7 sextillion percent rate. However, the source of the data was held by the government and the possible worry is that currently the economy of the country continues to hyper inflate, regardless of the reserve bank of Zimbabwe that has ignored it since November 2008 (Sturzenegger, 56).

The possible results from the hyper inflation has been subsequent drop out of investors from the country, fleeing of the laborers to the south Africa due to the increased cost of living, continuous printing of the notes, and the increase of poverty, as the level of savings is declining day after the others, yet no investment opportunities are implemented.

Recommendation

Hyper inflation can be reduced by means of drastic remedies, such as the reduction in the consumption and expenditure level of the government, so as to ensure that the cost of living and the currency level velocity is retarded. Another possible recommendation is the dollarization mode of inflation, where the countries adopt a currency of another developed countries. This has been suggested to the Zimbabwean government though it has been reluctant to use them as it’s authoritatively governed. In addition to that, the government can adequately curb the hyper inflation rate through the use of monetary policies, such as the increased taxation level. It means that the level of consumption declines. Other suggested monetary policies are the issuance of monetary bonds and bills to the public as a form of internal borrowing. Internal borrowing helps in reducing the money supply to the public hands that demands reduction. Lastly, the government can also decide to slash down the wages and prices of various commodities in the market, though this will on some occasion trigger the conflict of interest.

Conclusion

Hyper inflation is thus an issue that the government should advocate if it has to safeguard the cost of living of the people and to attract investors. The main causes of hyper inflation have been found to be controllable through the above mentioned and recommended solutions. However, for the case of Zimbabwe, the country can avoid it by the use of other countries currencies and if it embraces democracy. Moreover, the states can even avoid wars and other conflicting economic problems, such as black market and hoarding of goods, as they have been found to increase the velocity of the general prices of the commodities in the economy in addition to excessive printing of the currencies. 

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