Sunday, January 18, 2009

The Situation with Inflation (Sorta)

Today I realized that I don't really know anything about inflation. Strike that. I know all about forcing air into things to increase their volume. That sounds awful. Strike that, too. What I'm trying to say is, I don't know much about the concept of inflation as it relates to currency and the economic climate. I guess, basically, inflation is an increase in the price of goods and services as a result of a decrease in the purchasing power of a particular form of currency. I've been doing a little research this afternoon, and what actually causes inflation seems difficult to wrap one's head around. Apparently the causes aren't even agreed upon by many financial experts (or, I should say, that in cases where inflation isn't extreme, the potential number of contributing factors is such that it is very difficult to determine exactly what combination is the actual cause of the inflation).

The reason I'm thinking about inflation right now is because of recent news stories detailing the hyperinflation that Zimbabwe is currently experiencing. The Zimbabwean government is about to introduce a $100 trillion bill (300 bucks, U.S. currency). A loaf of bread costs $300 billion. The inflation rate in November was something like 89.7 sextillion percent, which means the price of goods doubles less than every 15 hours. How does something like this happen? Part of what exacerbates hyperinflation is the fact that people immediately exchange whatever money they get for some tangible goods in an effort to squeeze as much value out of their dollars as they can before the purchasing power decreases again. Entire countries get caught in vicious cycles of over-consumption and resource-hoarding in an attempt to stay ahead of the plummeting value of their currency. This can lead to a scarcity in goods that only further drives prices up.

Most transactions occurring in Zimbabwe right now are conducted with foreign currencies. It seems as though most people don't care what sort of money they're getting, as long as it's not the Zimbabwean dollar. How does a market stay afloat with no fixed currency (to the extent you could even say Zimbabwe's economy is "floating")? Surely it must be nightmarish to have to hash through exchange rates for multiple currencies, all of which change day-to-day as inflation makes the Zimbabwean dollar more and more useless. Essentially, what is occurring is called "dollarization," in which a country adopts the currency of another country as its official currency. Except this is illegal in Zimbabwe. So is inflation, for that matter. Goods-providers, under law, are not allowed to raise their prices. But it doesn't stop the train. It keeps barreling down the tracks, seemingly heading for a concrete wall. What exactly does a government do when its currency goes extinct? I find it all kind of brain-scrambling.

Apologies for not offering any clarification on all of this. Because I don't have enough understanding of economics, the best I can do is draw all of these events to your attention so it scrambles your brain, too. Cruel? Maybe. Then again, maybe you fully understand the forces in action here. Then the joke's on me, and the only inflation I should be worrying about is that of my silly little head.

Photos by AP and Reuters, respectively.

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