Inflation / Banking / Interest Rate Question.

The current situation in Zimbabwe, where inflation is at 100,000% PA was on my mind earlier. It struck me that it can't be possible to operate a banking system in such circumstances. Primarily due to the fact that people's deposits will become valueless very quickly.

So, what is the level of inflation at which a banking system may begin to fail ? How is this pegged against the current interest rate?

Would I be right in saying that so long as inflation does not exceed deposit interest rate by too much, then a bank system is viable ? And if it does, it isn't ?

This is a complicated question indeed. Who knows the answer. But what the banks really can't function under is deflation which is a real danger at the moment. Money is created into existance as loans so if the money supply is not increasing faster than the interest rate then the money to service the loans will not be there. The age old argument is that the reactions in the bond market will act to prevent an inflation but this could be rubbish. Very few think a deflation is possible in a fiat money system. A commentator I read called Gary North thinks otherwise and says that the fed is actually draining down liquidity. Those that dislike the fed will say that the fed shrinks the money supply so that it's owners can buy cheap. It has been reported the Morgan is a big shareholder in the fed and they really have done well lately for sure.

I am not the person to answer this. That wont stop me trying.

Given that the banking system depends more on peoples confidence in the market than on assets in the vault, the point at which the banking system becomes non-viable is the point at which belief in the system is suspended.

It's gone up to 200,000% since you wrote that, EVM
http://andrewsullivan.theatlantic.com/the_daily_dish/2008/03/africa-news.html

You are right there cactus. A bank lends 9 tenths of it's deposits so if confidence is lost they are finished. Was there not a threat by authorities there to go after those that were spreading rumours. Someone intended on making a profit by starting a bank run.

Wikipedia refers to a definition of hyperinflation as a monthly inflation rate of at least 50%

Rates of inflation of several hundred percent per month are often seen. Extreme examples include:

Germany in 1923 when the rate of inflation hit 3.25 × 10⁶ percent per month (prices double every 49 hours.

Greece during its occupation by German troops (1941-1944) with 8.55 × 10⁹ percent per month (prices double every 28 hours).

The most severe known incident of inflation was in Hungary after the end of World War II at 4.19 × 10¹⁶ percent per month (prices double every 15 hours).

More recently, Yugoslavia suffered 5 × 10¹⁵ percent inflation between 1 October 1993 and 24 January1994.

war war war war war
http://en.wikipedia.org/wiki/Hyperinflation

I have numerous 100000 mark notes from the 20s. They cost me 25 cents each. I had a million mark note but I lost it. A few years ago I think it was 60 minutes that did a section on some people who were spending large dollar amounts buying millions of Iraqi dinar in the hopes that the currency would rise big time. Not very wise so far.

I think it's less of a problem or less of an issue with banking than with general confidence in the economy - at least in the extreme case of Zimbabwe and the others listed above. In these cases the economic balance between work, production and the structures used to put wealth around the economy have totally failed, collapsed. The economy has gone into an interminable loop with paper money literally better off used as toilet paper because the cost of toilet paper is higher than the value of your money.

Unfortunately all the extreme cases above were closely associated with war, most famously the Weimar Republic's interminable loop being interrupted by the massive aggression of World War II.

Maybe that's cheap but what else is going to happen in Zimbabwe now?


Maybe Mugabe is killing the economy on his way down? He could be flooding it with useless money and destroying it that way.
http://english.aljazeera.net/NR/exeres/E125B1C2-E916-47F2-A304-A67034509E46.htm

So how does a new administration go about reversing this kind of inflation ?
Presumably it is so high because of shortage of food/goods. So do they flood the place with food/goods ?
Or is it enough simply to introduce some supply stability.

In Zimbabee getting rid of inflation is the simplist thing in the world. Just stop printing money

youngdan wrote:

In Zimbabee getting rid of inflation is the simplist thing in the world. Just stop printing money

Well that isn't so complicated.
So is the theory then that if people run out of cash then prices will have to stabilise or fall. ?

IN Zimbabee the inflation was to mask the fact that the country was not producing anything of value with which to buy the goods it needed. When price controls were introduced it led to shortages because why would a shopkeeper sell something when the price was too low and he would be losing money

Good article below from October last year, illustrating how the Stock Market in Zimbabwe though one of the most impressive performing in the world, has no or very little relation to GDP - which has been falling - much more important for feeding your people than the industry of gambling on the stock market.

http://www.mises.org/story/2532

This is what we are seeing in Zimbabwe. With the country suffering from Mugabe's catastrophic policies, increasingly the only means for the government to fund itself has been money-supply growth. This has only exacerbated the economy's problems. The flood of new money that authorities have created has caused the existing value of money in circulation to plummet, i.e., the prices of all sorts of goods to explode, some rising more than others.

So it goes in a spiral - they print more money and now less people are working and instead are only buying but now prices start to go up but instead of reducing the money supply or making people work or whatever, they print more money until all you have left is a 'fire-sale' - people are only cleaning the shelves out and feck all else.

They need to restore balance and reducing that money supply should be the start - unemployment policies then and maybe price controls in the meantime...?

Capitalism is in crisis.

Auditor, what is happening in that market is the money going down and not the share value going up. Reading articles by Ludwig von Mises gives a good understanding of what is known as The Austrian School of Economics. But the more important question is where did they get that photo of me from a few years ago. This was before the missus,who I introduced to all in the video clip, spent my money and left me in the queue. Och och ochoin.

youngdan - party here on the site on Sunday night around 9.30 p.m.
It is BYO food and drink apart from the visuals, Party music and disco balls, room full of coats, bar and kitchen on site. Please come and bring a friend. Plenty of room for economic theory in the kitchen, hallway and on the blue sofa.

Sunday Night ?? I thought it was Saturday.

Not everyone is a loser from the credit crunch. Read this story of a poor soul By Stephen Foley In New York. Thursday April 17 2008 ... who took home $3.7bn (£1.9bn) last year, after betting on a calamity in the mortgage market. ...
www.independent.ie/.../north-america/he-bet-on-the-credit-crisis--and-took-home-37bn-last-year-1350342.html - 5 hours ago - Similar pages
ul

Zimbabwe have hiked their interest rates on borrowings to upto 3000% in an attempt to control the inflation

http://allafrica.com/stories/200804110650.html

From that article
The new rates are too high to attract meaningful borrowings by companies. High interest rates have curtailed the growth of bank loan books as borrowers shy away because they have become prohibitive," an economist with a commercial bank said.

All they have to do to control inflation is stop printing money.

youngdan wrote:

Not everyone is a loser from the credit crunch. Read this story of a poor soul By Stephen Foley In New York. Thursday April 17 2008 ... who took home $3.7bn (£1.9bn) last year, after betting on a calamity in the mortgage market. ...
www.independent.ie/.../north-america/he-bet-on-the-credit-crisis--and-took-home-37bn-last-year-1350342.html - 5 hours ago - Similar pages
ul

I still dont reallty understand how people make money on a falling market.

And is it right that people can bet on these sorts of things - currencies and the whole lot...

I have lost a lot of money betting on stocks falling. I have also had some good wins when stocks fall. The mechanics of short selling as it is known will be given later. You can bet on practically anything. That manager would be playing the futures markets and while not knowing his exact bets I will explain how you can win or lose many multiples of your stake.

Sorry dan but I'm not a gambling man but if you want to go ahead and explain the mechanics i'm sure that's perfectly acceptable

cactus flower wrote:

youngdan wrote:

Not everyone is a loser from the credit crunch. Read this story of a poor soul By Stephen Foley In New York. Thursday April 17 2008 ... who took home $3.7bn (£1.9bn) last year, after betting on a calamity in the mortgage market. ...
www.independent.ie/.../north-america/he-bet-on-the-credit-crisis--and-took-home-37bn-last-year-1350342.html - 5 hours ago - Similar pages
ul

I still dont reallty understand how people make money on a falling market.

By selling stuff which they don't have, but will buy later at a lower price...I think. Short selling or something. But don't go by me, I'm fairly thick on this stuff.