The monetary policy is in the news again. Every time Ben Bernanke sneezes, markets react. One would think that just by virtue of being “open or closed to accommodations”, markets wouldn’t rally and valley so violently, but in the hyper-connected world of nanosecond trading, it’s the new reality.
Many contrarian economists and businessmen have been warning against currency hyperinflation, but you wouldn’t know it if you turned on the television or read the blogs. During periods of hyperinflation, or out-of-control inflation, real prices of goods and services stay relatively fixed in relation to stable assets (including stable foreign currencies), but nominal values for those goods and services rise uncontrollably. This happens because the central issuing authority, most likely a central bank, issued too much currency or never stopped issuing currency. Thus, the ever-expanding pool of currency had to chase the same or shrinking pool of goods and services, causing nominal prices to rise.
The worst periods of hyperinflation in world history happened in Hungary (1946), Zimbabwe (2008), Yugoslavia (1994), Germany (1923), Greece (1944), and Taiwan (1949). The longest doubling time of nominal prices for above examples is 7 days, the shortest – 15 hours. This means that the entire post-war Hungary had to deal with her citizens’ money losing half of its value during the time that it takes modern Americans to put in a work day, come home, and crack a beer in front of a TV.
A lot of people today just go “huh?” and ignore the breathtaking implications of such an event. Under those conditions, if you checked your bank balance of $1,000 before you went to work at 8 am, by the time you went to bed after The Daily Show, it would buy only $500 worth of bread, milk, eggs, and gasoline. The next day during lunch, it would purchase only $250 worth of stuff. The value of your money would be split in half 11 times before the week was over, and the initial $1,000 would be worth a measly fifty cents.
During the course of one week, Sunday to Sunday, your initial thousand dollars would effectively turn into fifty cents. If you don’t think this could ever happen, all I can say is that history is not on your side.
I want to briefly cover the monetary policy events that occurred in post-USSR Ukraine. I was 13 back then, and my parents did their best to shield my sister and I from this catastrophe, but I still remember it well.
My father was in the military, so he had to rely on the monthly paychecks from the government to feed his family. I remember that he brought home several hundred of the karbovanets, which was designated as transitional currency. The 1′s were brown, 3′s were green, 5′s were blue, and 10′s were bright pink. The 100′s were also brown, which prompted the entire country to wonder what brain-dead bureaucrat approved that idiotic design — anyone with a steady hand could draw two zeroes on the end of a “1″ bill and pass it as a hundred. People caught on very quickly, but I personally know of a couple of folks who got taken advantage of.
Not even two months later, Dad brought home a thousand. He never even referred to it by name, he just said “I am now a thousandaire” and “I brought home a thousand of money”. That was the month when he instructed us as a family to go out and buy the necessities. You couldn’t just go out and buy stuff you needed because you had to perpetually try to figure out when the next delivery to the store will happen. I remember always waiting for the bread truck, the milk truck, and if fortune smiled, there would also be a meat truck. It was easier for us boys to just grab out trusty slingshots, climb the fence of the neighboring dairy processing plant, and come home loaded with pilfered milk, kefir, and cottage cheese.
Several weeks month went by, and my father brought home this little gem:
I was pretty good at math, but I just couldn’t figure out why all those zeroes in his paycheck didn’t automatically mean that we all of a sudden became fabulously wealthy. No one bothered to explain this conundrum to me, and I quickly adjusted to the fast-changing reality. During that time, my friends and I quickly figured out that returning empty bottles for deposit yielded crazy money because the government-owned stores always lagged behind in adjusting the prices upward, but the private bottle return places did it like clockwork. This would be similar to a resident of Michigan, California, or Oregon today returning just a few of their empties and buying several days’ worth of food.
By the time 1991 was over, prices rose 290% by government statistics. Living in that environment officially became weird. I remember waking up from a good night’s sleep in August, and my Mom, beaming, announced that “we’re independent now”. That meant almost nothing to me — I had to go raid neighboring orchards for Golden Delicious’ with my friends.
At this time, Dad was sending home paper money with more zeroes on them. I lost track of what cost what amount of money, so every time Grandma sent me to the store with a heap of colorful currency, I just eyeballed the thickness of the stack and roughly what hue it was. I think that was the year we started going to my uncle’s plot of land to plant some potatoes and salad vegetables.
1992 wasn’t any better. We moved for my Dad’s new job into a town of 30,000 people, more than half — “budgeteer” military like us. No one got paid on time, and when they did, the inflation took enormous bites out of the paychecks. Teachers went unpaid for 8 months, and when the money finally came for distribution, those poor saps got paid in unadjusted paychecks from 8 months ago. In 1992, the annual rate of inflation skyrocketed to 2,000%, which means teachers experienced a whopping 1,300% of it. This would be like awaiting your $2,000 paycheck and receiving $154 of it, eight months later. They still came to school and taught classes, though. I’ve never seen such dedication since.
By this time, everyone was working the land. Nowadays in the US, there’s a 100-year ravine between your average Joe and his closest farmer ancestor. In Ukraine, no one lived too far from the land. There’s always a grandma in a village somewhere, working that hoe with her butt in the air, eager to share her potatoes and pickles with the grandkids “from the city”.
No matter occupation, you tended to your 0.03 acres after work, and mostly throughout the weekend. Everyone left the city on Saturday mornings, and on Sunday nights hordes of tired and dirty city-dwellers packed into city-bound commuter trains to return home. They dropped off gardening tools in sheds and garages, walked the dark streets to their flats almost forgetting that electricity and running water have been shut off by the state-owned utility companies in an effort to conserve.
At this time, a friend of my father’s used his one most prized possession — an early model JVC VHS camcorder — to film weddings, and get paid with food for his services. I heard stories of real estate — apartments and even houses — being traded for Soviet-made cars and imported electronics like Panasonic VCRs. Things were so out of whack fiscally that only pensioners and those on fixed income complained. Everyone else had to hustle, so there was little time to stop and catch breath.
In 1993, things got interesting. The official rate of inflation hit a staggering 10,156%. Later I learned that it’s ranked 27th worst period of hyperinflation in world history. Prices went absolutely nuts, and my Dad became a millionaire. He came home one night, shoved a stack of bills into my hand and said, “There you go, you’re now a millionaire”.
People tried to buy something, anything, to convert useless paper into something real. A sack of sugar or flower were worth their weight in gold, although, surprisingly, no precious metals were ever involved in economic transactions. I frequently saw people trade car tires on the side of the road for laundry detergent, socks, and plumbing supplies. Normal economic activity, in which units of local currency are exchanged for goods and services, pretty much collapsed. State-owned stores turned into empty, echoey hangars with a distinct post-apocalyptic feel, but the private “portals” were jam-packed with Turkish candies, counterfeit booze, cigarettes, and anything else you wish to pay for with your hard-earned Deutchemarks and US Dollars. I’ll never forget the face of a thirty-something, bedraggled cashier from one of these empty stores, proclaiming that “We’re out of milk. We’re out of bread. We’re out of kefir. Yes, we’re out of everything”.
We survived 93, and then things eased up … relatively-speaking, of course. Inflation was still in the double digits, but people adjusted. The US Dollar ruled supreme after the currency peg was established.