Sunday, July 19, 2015

[umplxblz] Hyperinflation

Hyperinflation is a curious economic phenomenon because it seems not completely understood, despite being very dramatic and having happened many times around the world.

Fundamentally, the curious aspect is that a lot of people are acting irrationally regarding the currency, so one would expect rational actors in the market to be able to take advantage of their irrationality, stabilizing the value of the currency.

Even if a government is unable to effectively collect taxes, the government still holds monopolies (e.g., licenses, fines) and monopsonies (e.g., government procurement, government labor) on various goods and services, so assuming transactions for these things must be done with the fiat currency, they seem to be a stabilizing force that would define value of the currency.

We hypothesize that hyperinflation occurs when there is market failure in these stabilizing mechanisms.  There must be something else going on: for example, overt or covert international forces deliberately wanting to reduce the target country's economy to chaos via hyperinflation, perhaps part of a political power struggle.  What is the nature of these forces, and how do they cause market failure?

The inspiration is, of course, Greece, which according to one report, has a weak government unable to effectively collect taxes.  If so, it would be practical to instead "raise" revenue through the inflation tax.  (Perhaps correct its inherent regressiveness through other redistribution mechanisms, though I don't know what.)   If Greece exits the European Monetary Union (euro), could it transition to a stable economy with high inflation, or is it doomed to hyperinflation?  Greece certainly has made, or will make, a lot of enemies if it defaults on its debt.  Can those enemies deliberately induce hyperinflation?  Is that threat affecting policy?

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