Sunday, May 30, 2010

1,000% Inflation in Zimbabwe---It is important to protect your currency, isn't it??

Inflation is a thief in the night (or day) that literally reaches into your pocket to take your money.  Actually, it reduces the purchasing power of  your money.  You can think of price increases in two ways: the value of  goods/services increases because they become relatively scarce, or the money used to buy those goods or services is worth less than it was before and now it takes more of it to exchange for those goods/services. Zimbabwe is good example of the devastation inflation reaps on a country.  A once thriving country is now reduced to monetary ashes. Inflation is not the only cause of its decline, but it will likely be its complete downfall.  A country cannot print more money than its economy can produce in "stuff"...If you increase the money supply by 10% then, assuming constant velocity of money (the rate at which your money supply "turns over to buy GDP), you must produce 10% more in goods and services to maintain price stability.  Anything less than that then you have the classic definition of inflation--"too much money chasing too few goods". 

From BBC: Zimbabwe's inflation tops 1,000%
""Zimbabwe's inflation rate has surged past the 1,000% mark signalling that the African country is struggling to keep its economy functioning normally. The annual rate of price growth was 1,042.9% in April, the Central Statistics Office (CSO) said, having risen 129 percentage points from March....Zimbabwe is a country that is blighted by crumbling urban infrastructure. There are regular water and power cuts, while the cost of everyday foods has surged. A loaf of bread now costs between Z$80,000 - Z$110,000 (79 US cents - $1.08) up from about Z$7,500 last year, when the price was controlled by the government. A carton of orange juice costs about Z$500,000 and a kilo of beef up to Z$1m.
This is an excellent example of "The Menu Costs of Inflation" (the expense in having to change the posted prices on a regular basis for businesses) and/or the "Shoe Leather Costs of Inflation" (the increase in transaction costs--i.e.-having to go to bank to get more money to conduct business).
"Business quotations are not valid for more than two days," an office manager in Harare told the BBC News website. "Actually I have one in front of me which says it is valid for 24 hours. Prices can literally double overnight," she said...""
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