Week 3 Discussion Responses - Econ

Discussion 1 Response

By Z,T

Time-frame, duration and rate of inflation

The Democratic Republic of Congo (DRC), the former Zaire, has been (and continues to go) through periods of political instability which strongly negatively impacted the country’s economic and social life. This DRC has immense natural resources and has “the potential to become one of the richest economies on the African continent and a driver of African growth” (World Bank, 2017). Inflation has been part of the economic life of the DRC since about a decade after the colonization by Belgium. The inflation fluctuated from an average 21% in the early seventies to a 1994 average inflation of about 24,000% (Nachega, 2005). 

Root causes of the inflation

The inflation in the DRC is closely related to the political state of the country. In the 1980s and 1990s, government spending was out control and was matched to inadequate revenue collection (Beaugrand, 1997). In order to support its outrageous spending, the government engaged in currency printing (Beaugrand, 1997; Nachega, 2005) or “systematic financing of large budget deficits through seigniorage” (Nachega, 2005) and large external loans (Nachega, 2005).  Population discontent was calmed with “unsustainably large” wage increases while there was drastic drops in mining revenues. In addition, international aid was terminated in response to violent repressions of political protects that were happening all over the country (Beaugrand, 1997).

 Interest rates and major economic consequences of the inflation and Inflation control

The large fiscal deficit (11% to 13.1%of the GDP in 1990) placed the country in a downward spiral of inflation, currency and decline in output with all the correlated social consequences (Beaugrand, 1997; Nachega, 2005). The amount of foreign currency in circulation increased rapidly, with the population boycotting the national banknotes and numerous transactions set in foreign currencies (Beaugrand, 1997). Attempts to tame inflation included the control of currency issuance and effective management and control of budgetary operations. After the ousting of the dictator and installation of a new president, strict monetary and fiscal policies contributed to a drop of the inflation to 14% in 1997 (Nachega, 2005).

 

REFERENCES

Beaugrand P. (1997). Zaire’s hyperinflation 1990-1996. Accessed from https://www.imf.org/en/Publications/WP/Issues/2016/12/30/Zares-Hyperinflation-1990-96-2174  

Nachega J.-C. (2005). Fiscal Dominance and Inflation in the Democratic Republic of the Congo. Accessed from https://www.imf.org/external/pubs/ft/wp/2005/wp05221.pdf  

World Bank. (2017). The World Bank In Democratic Republic of Congo. Accessed from http://www.worldbank.org/en/country/drc/overview

 Discussion Response 2

By B,R

Summarize the time-frame, duration and rate of inflation

            Hungary 1945-1946 post World War II, the people living during this time period suffered the worst inflation that the world has ever seen. It started in late December 1945 and did not cease till August 1946. “At the height of Hungary’s inflation, the CATO study estimates that the daily inflation rate stood at 195%, with prices doubling approximately every 15.6 hours, coming out to a monthly inflation rate of 13.6 quadrillion percent”  (Whelan, n.d.).

Analyze the Root Causes of the Inflation

            At the end of WWI Hungary was in a very weak economic condition. To help stabilize the economy the government released the pengo as a new form of currency. On top of this Hungarian agriculture was hard pressed from the Great Depression. These issues caused bank to devalue the pengo currency. Additionally, territories that were lost during WWI were given back to Hungary. At this point though the land was underdeveloped and ended up causing far more financial stress to the country. By the time WWII erupted across Europe, Hungary was already in an extremely weak economic position. During the war Hungary was ravage by Germany and Russia. This led to the destruction of industry and agriculture. The transportation system was either destroyed or seized by Russia as reparations. With inflation on the rise post WWI the Hungarian government tried to boost the economy by printing money this new money flooded the country caused nearly instant hyperinflation.

Interest Rates During the Inflationary Period

            Typically speaking, interest rates are higher than inflation rates (Pettinger, 2008). This would help maintain the actual value of money that is being kept in banks. When hyperinflation occurs it is impossible for interest rates to keep up. While I could not find any specific data on the Hungarian interest rates, it seems safe to say that interest rates were nowhere near able to keep up with the rate of inflation and therefore people who had money in bank accounts saw the real value wiped out instantly.

Describe the Consequences of the Inflation

            The country was in extreme disarray. All of the citizens were impacted in a very negative way. Workers paid a heavy price during the hyperinflation. “Real wages fell by over 80% as a result of the inflation, and though the workers had jobs, they were pushed into poverty by the hyperinflation. Creditors were wiped out” (Taylor, 2014). The Soviet Union eventually took advantage of the chaos and seized the country and created the People’s Republic of Hungary in 1949 and used a new constitution based on that of the Soviet Union.

Explain How They Were Able to Control Inflation

            The government tried several ways to stop the rampant inflation problems. The first was a capital levy in which people would turn in 400 pengo and receive 100 in return. This failed though because the government did not stop printing money and the market was still flooded. The Government also tried changing the name of the currency to the Milpengo which was replaced by the Bilpengo which became the Adopengo, all of them failed (Taylor, n.d.). Finally, the Forint replaced the Pengo in August 1946 and the prices for this currency remained stable and are still used to this day.

 

References

Investopedia. (2015, June). What are some historic examples of hyperinflation? Retrieved on July 13, 2017 from http://www.investopedia.com/ask/answers/061515/what-are-some-historic-examples-hyperinflation.asp

Pettinger, Tejvan. (2008, April). Hyperinflation – Causes, Costs and Examples. Economics Help. Retrieved on July 13, 2017 from http://econ.economicshelp.org/2008/04/hyperinflation-causes-costs-and.html

Taylor, Bryan. (2014, April). The Worst Case of Hyperinflation in History. Business Insider. Retrieved on July 12, 2017 from http://www.businessinsider.com/hungarys-hyperinflation-story-2014-4

Taylor, Bryan. (n.d.). The Worst Hyperinflations in History: Hungary. Retrieved on July 13, 2017 from https://www.globalfinancialdata.com/gfdblog/?p=2382

Whelan, Karl. (n.d.). Top 5 Hyperinflations of All Time. CNBC. Retrieved on July 12, 2017 from http://www.karlwhelan.com/IMB/Hyperinflations.pdf