I wonder if any of you econ wizards can a question for me. When a country experiences hyperinflation such as Germany in the 1920/30s I don't quite understand how that affected savers. In this example historybooks tell us that it was the middle class and the elderly who had saved all their lives that suffered greatly. Purchasing power rapidly diminished with (e.g.) a cup of coffee increasing in cost 1000% in a week. Now surely if inflation is that high then the interest rates on savings will also be high. I am assuming here of course that interest rates are free floating and not controlled in the way the fed controls them today. So surely this should not affect the pots that people have saved too much as they too will be rising in line with the hyperinflation??? Thanks Funster
It is unlikely that interest rates would rise enough to compensate for the high rate of CPI inflation. i.e., they would not rise above 100% p.a.
Usually hyperinflation makes a precise reading of the CPI inflation level difficult. Further more the rate of price changes accelerates as it feeds upon itself. Thus there would be a tendancy for nominal interest rates to be constantly playing catch up with the prevailing rate of CPI inflation, resulting in negative real interest rates.
I guess the monetary risks are extremely high in a hyperinflation environment. Brazil has one of the weakest and most unstable currencies in the world, inflation is rising, and is steadily high on a yearly basis (almost 10%). Interest rates on lending from banks is more than 10% per month (!!!) if you'd like to finance buying an apartment etc.; you won't get a payment plan showing the full calendar until final downpayment - you'd only get information of your monthly payments. Since the schools here only have 4 hours of education a day (primary, secondary/high school - I'm not totally sure about university) - mathematical skills etc. are extremely poor. If you open a bank account here, after a few months your balance would have declined, not increased, because of monthly fees, all kinds of stupid administration and withdrawal fees including ICMS (effectively VAT). It's a financial system in shambles, totally irrational in my views, and it makes it impossible to have savings - even guarding your money in the mattress is really stupid. It is illegal to have e.g. USD for normal people as well. Property investment is the only low-risk type of investment, all other forms of investment are totally over-risked. Brazil has experienced big jumps in inflation and currency devaluation many times, and I don't think we've seen the last of it yet. It has made a lot of foreign companies pull out with bleeding losses during the last few years. Maybe this gives you an idea of what kind of environment high-inflation provides, and looking to Argentina the last few years, you might remember how banks withheld peoples savings, spurring revolts all over the country. The smart ones had their money in neighbouring Paraguay - but even there they ran into problems because of nervousness over Argentina's situation. The US bailed them out with a small amount, though. Banks become extremely protective during extreme devaluation or high-inflation times. It does not make for any sound financial investments. Save for types like Berlusconi and what he did in Afghanistan, after all infrastructure was bombed to shraps, and he seized the opportunity to buy TV-rights/-stations. It's a nice way to make sure you get an almost monopoly on media like TV, for basically nothing moneywise. I guess that's paying off really well soon. During the presidential election here in Brazil 18 months ago, I used the opportunity of buying a Jeep Grand Cherokee (Overland) and a house by the beach. The car is worth more now than when I bought it - in international currencies. The same goes for the house - considering inflation and a stronger currency.
Hey Funster, My family lived in Germany during that time, and until the late 90's. I am still half-German and I've grown up and been schooled there. So I've gotten a good bit on the German history. My family during that time, spell great-grandparentsn were very very wealthy... To make it short, we were a Hanseat Hamburg-based dynasty of coffee traders for several centuries (about 500 years afaik), and later on controlled a lot more, such as several of Hamburg's largest banks at the time. When Hitler took Germany, it was all over. Finance went down, and inflation came. My grandfather's grandfather at the time, who owned the largest bank back then, was part Jewish, and Hitler had taken most rights and control off him. Yet, he pretended everything was OK, and continued going "to work" at "his bank" for another 8 years, just not to worry his family. Hyperinflation came, and my family, not long before worth hundreds of millions (at a time where you could buy a nice car for DM 800 or so), had left nothing, but the places they lived in. It didn't take long till their net worth was that of a postage stamp... I still have some 500-Million-Reichsmark stamps in my collection here... It was a crazy chain of events. Of course they had to give up all their possessions too, just to be able to eat. They couldn't maintain anything. My grandfather's grandfather eventually disappeared somehow - let's not speculate. My grandfather's uncle also ended his story rather tragically. My grandfather used to tell me about how when he was a kid, he would stay at his uncle's and drive around through his estate in his own little horse coach, over white bridges bridging his uncle's rivers. Obviously, he was extremely wealthy, too. The centre of his estate was literally a castle, and a he owned a stud of over 500 of the finest thoroughbred horses, just for his entertainment. We still have photos of the estate, it was massive. One day, Hitler came and demanded his stud for the purposes of warfare. He refused, then was told that he had the choice between being offered great war honors, golden stars and hero status in the name of the Reich for his donation, or if he refused, to be detained and have his stud taken, anyway. Well, he thought about it, and decided that he loved his horses too much to have them suffer in in Hitler's crazy war. He organized very large amounts of explosives and blew himself up, inmidst his entire stud and anything he owned and loved. There went another one. My grandfather's father also disappeared at some stage, so his mother (my great-grandmother) was suddenly solely responsible for caring for him and his older brother during the war, and did anything to bring them through... The lady who used to spend over DM 100,000 per day on "Attire, jewellery and other household amenities" (we still have the household diaries), was now walking from door to door, selling vacuum cleaners, in the hope to make it through the toughest times. She was celebrated a hero of our family, and finally died at the age of 95, one day before I was born. Scrolling back another 50 years, after the war, our family started anew, all from scratch. A long dynasty and fallen, but the spirit was still there. There was nothing more to lose and everything to gain. What was the reason for all this misery? Well, money pumping, hyperinflation, and the terror of the nazi regime. There's a great lesson to be learnt here: Money really can't be eaten and can become worth nothing any day... Be prepared...
most of the people saved in interest earning accounts in their bank during those times. Unfortunately for then and now, the interest the banks pay you and the interest they make off of their businesses are wildly different. The bank rate changes very slowly too; while the inflation can surge on and on. Everything from the central bank to the savings bank react slower than the marketplace because they have to discuss. right now in the US inflation is rising but the Fed is not moving rates; an example of delayed reaction to inflation. When the banks start to react, they determinedly keep the interest rates lower because of fear that their loan activities will not perform fast or consistent enough to pay off the higher interest. That is why banks are less amenable to loaning out money during high interest then low interest environments. Hyperinflation becomes an incredible barrier to the economy and leaves people's savings in tatters. the main counters in personal savings to it are commodities, especially gold & silver. or you can hold your savings in a more stable currency. Both activities are usually open to sophisticated investors, not the common man. -m.o.
It was the savers' original saved principal which was mainly affected. If you had $1000 saved today and someone else had $1,000,000 saved today. Then, if by next week prices had gone up %1000 which would be 10 times, your $1000 (1000/10 )would buy $100 worth of goods and services at todays prices. You basically lost $900. The other person's $1,000,000 (1,000,000/10) would buy $100,000 worth of goods and services at todays prices. They lost $900,000. A $900 loss is bad a $900,000 loss is generally devastating! Hope this helps. It was the original (saved) principal which was mainly affected by the following inflation.
Scientist, You might want to brush up on your German history before you tell the family story next time. German hyperinflation occurred during the period July 1922 to November 1923. Hitler had nothing to do with it; he came to power ten years later.
Thanks guys, Basically the answer then is that, in the real world, the banks, government and other institutions would, due to their own nervousness, probably be expected to conspire against the common saver in some such way that would have a contra or lagging effect to the predominant trend of hyperinflation. Scientist - I too am descended from a once-reaonably-wealthly german/jewish background. Interesting stuff.