Thursday, March 22, 2007

2 Stories on Inflation

First, Venezuela is trying to combat inflation by revaluing the bolivar (the Venezuelan currency). The new currency, the boliver fuerte, will be worth 1,000 of the old bolivars. The inflation rate in Venezuela recently reached 20%. The problem with this policy is that it will not have much effect unless the underlying causes of the inflation (like increases in public spending) are taken care of. In fact,
Gastón Parra, the president of the central bank, went on television this week to emphasize that the effect of these measures on the value of Venezuela’s currency would be neutral, neither increasing or decreasing salaries, debts nor the price of consumer goods. Private economists, however, say the changes, combined with inflation, could heighten confusion over prices.
An extreme case of inflation problems is Zimbabwe. The World Bank estimates that inflation in that country will reach 4,000% by the end of the year. That means that a t-shirt that cost $10 in January will cost $410 by December. It has reached the point where "Business deals can only be negotiated a few hours ahead because prices are rising so rapidly." The article also mentions that the printing of money by the Zimbabwean government was temporarily stopped because the government "ran out of foreign currency to pay for the paper and ink it needed for the bank notes."

(Source: Free Exchange)


Anonymous said...

These inflation issues highlight the importance of having a well balanced economy. In Venezuela, the problem of trying to increase public spending could one that seems almost impossible to tackle. With poverty being such an issue, it would be hard to have people change their spending habits and start consuming more. They are accustom to adapting with nothing. The inflation will not imrove unless there is a signifigant increase in public spending. 20% is a huge increase, but the 4000% in Zimbabwe is unparalelled. When business deals have to be negotiated based upon the hour of the day, you know there is a huge problem!


Anonymous said...

The idea of reintroducting the 12.5 cent coin in venezuela is a weak idea, but it has potential , and it is a step in the right direction for the country. The idea behind reintroducing the coin is that it will bring consumer cofidnece as they remember the good days in the 70's and 80's, when the economy was strong. However, since 1/3 of the population is under 18, and doesn't remember those days, the coin is not going to have as much effect as people would like. The Zimbabwean government needs to control the supply of their currency; printing more money is only going to continue to decrease the value and add to the inflation problem.

Anonymous said...

The huge inflation in both Zimbabwe and Venezuela is, as stated pretty clearly in the two articles, due to structural and political instability. Both governments seem to be nationalizing many institutions and increasing their public spending a great deal. While it is a nice idea to increase consumer confidence by tugging at their heartstrings with old-fashioned coins, Chavez is doing his people a great disservice. According to the article, the country has 30 billion in foreign reserves, implying an economically stable government. The best thing the Venezuelan government could do to boost the confidence of the citizens in their economy and alleviate the inflation is to back off of involvemnet in business and industry.


Anonymous said...

It's like when we were talking about how even if the economy isnt doing well, we are constantly being assured just the opposite so that we dont falter due to our own predictions. It seems that something similar is needed here. Printing and wasting money seems useless when they need to help their citizens get back on track before hand. Once the economy is stable again is when it would make sense to resume printing since they are obviously lacking the resources for it currently.


Anonymous said...

I agree with Emily that the reintroduction of the old coin is a well-meaning but weak idea. Bringing back a coin that only reminds people of a more stable economy will not do much to bring back consumer confidence; so therefore, consumer spending will probably not increase enough to make a difference. Along with the coin there should be more plans and rules to build a stronger economy and increase private investment.

Anonymous said...

I also agree with Emily and Kate that it would be a good idea to reintroduce the coin for, I guess, nostalgic reasons but only if the country wasn't lacking in funding for their regular currency already. The country needs to stablize a little more before introducing something. Zimbabwe's situation seems like one that has spiraled so far out of control it may not be possible to fix without outside help. But how can you really help a country with major inflation problems? Do you lend them money or would that only start the problem of debt? I found the comment about Zimbabwe and how business deals must be made according to the hour so incredibly amazing (not in a good way). I honestly can not imagine what a consumer's lifestyle would be like with such constantly changing prices.

-sara diehl