Wednesday, December 22, 2021

Inflation, Hyperinflation, Deflation At: Visionaire Business Center

 Inflation, Hyperinflation, Deflation Explained By:



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Inflation, In economics, inflation refers to a general progressive increase in prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.
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The opposite of inflation is deflation, a sustained decrease in the general price level of goods and services. The common measure of inflation is the inflation rate, the annualised percentage change in a general price index.
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Inflation...
Inflation is a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in an economy.
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Hyperinflation...
In economics, hyperinflation is very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase.

This causes people to minimize their holdings in that currency as they usually switch to more stable foreign currencies, such as the US dollar. When measured in stable foreign currencies, prices typically remain stable.
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Hyperinflation: Its Causes and Effects:
Causes of Hyperinflation
Hyperinflation has two main causes: an increase in the money supply and demand-pull inflation. The former happens when a country's government begins printing money to pay for its spending. As it increases the money supply, prices rise as in regular inflation.

The other cause, demand-pull inflation, occurs when a surge in demand outstrips supply, sending prices higher. This can happen due to increased consumer spending due to a growing economy, a sudden rise in exports, or more government spending.
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Effects of Hyperinflation...
When hyperinflation is in effect, consumer behavior adjusts. To keep from paying more for goods tomorrow, people begin hoarding today.

That stockpiling creates shortages. Hoarding can start with durable goods, such as automobiles and washing machines. If hyperinflation continues, people hoard perishable goods, like bread and milk.
These daily supplies become scarce, and more expensive, and the economy falls apart.
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Hyperinflation sends the value of the currency plummeting in foreign exchange markets. The nation's importers go out of business as the cost of foreign goods skyrockets. Unemployment rises as companies fold.

Government tax revenues fall and it has trouble providing basic services. The government prints more money to pay its bills, worsening the hyperinflation.
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There are two winners in hyperinflation. The first beneficiaries are those who took out loans and find that the collapsing value of the currency makes their debt worthless by comparison until it is virtually wiped out.

Second, Exporters are also winners because the falling value of the local currency makes exports cheaper compared to foreign competitors. Additionally, exporters receive hard foreign currency, which increases in value as the local currency falls.
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Hyperinflation in Weimar Germany
The most well-known example of hyperinflation was during the Weimar Republic in Germany in the 1920s. Through World War I, the amount of German paper marks increased by a factor of four. By the end of 1923, it had increased by billions of times. From the outbreak of the war until November 1923, the German Reichsbank issued 92.8 quintillion paper marks. In that period, the value of the mark fell from about four to the dollar to one trillion to the dollar.34

At first, this fiscal stimulus lowered the cost of exports and increased economic growth.

When the war ended, the Allies saddled Germany with another 132 billion marks in war reparations. Production collapsed, leading to a shortage of goods, especially food. Because there was excess cash in circulation, and few goods, the price of everyday items doubled every 3.7 days
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Hyperinflation in Venezuela
The most recent example of hyperinflation is in Venezuela. Prices rose 41% in 2013, and by 2018 inflation was at 65,000%.6 In 2017, the government increased the money supply by 14%.7 It is promoting a new cryptocurrency, the "Petro," because the bolivar lost almost all its value against the U.S. dollar.

Unemployment rose to over 20%, similar to the U.S. rate during the Great Depression.

How did Venezuela find itself in such a mess? Former President Hugo Chávez had instituted price controls for food and medicine. But mandated prices were so low it forced domestic companies out of business.
In response, the government paid for imports. In 2014, oil prices plummeted, eroding revenues to the government-owned oil companies. When the government ran out of cash, it started printing more.

As of 2016, Venezuela’s foreign debt was about $100 billion.

The annual inflation rate for consumer prices was at 2,300% percent in early 2020.
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Hyperinflation in Zimbabwe
Zimbabwe experienced hyperinflation between 2004 and 2009. The government printed money to pay for the war in the Congo. Also, droughts and farm confiscation restricted the supply of food and other locally produced goods.

As a result, hyperinflation was worse than in Germany. The inflation rate was 98% a day, and prices doubled every 24 hours.13

It finally ended when the country retired its currency and replaced it with a system that used multiple foreign currencies, predominantly the U.S. dollar.
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Hyperinflation in the United States
The only time the U.S. suffered hyperinflation was during the Civil War when the Confederate government printed money to pay for the war. 1718 If hyperinflation were to reoccur in the U.S., the Consumer Price Index would measure it.

The current inflation rate shows that the U.S. is nowhere near hyperinflation (it isn't even in the double digits).19 In fact, inflation may be too low, as mild inflation can be good for economic growth.

The Federal Reserve prevents hyperinflation in America with monetary policy. The Fed's primary job is to control inflation while avoiding recession. It does this by tightening or relaxing the money supply, which is the amount of money allowed into the market.


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Deflation...
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflation increases it.

This allows more goods and services to be bought than before with the same amount of currency. Deflation is distinct from disinflation, a slow-down in the inflation rate, i.e. when inflation declines to a lower rate but is still positive.
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Deflation is the general decline of the price level of goods and services. Deflation is usually associated with a contraction in the supply of money and credit, but prices can also fall due to...

Deflation is the general decline of the price level of goods and services.
Deflation is usually associated with a contraction in the supply of money and credit, but prices can also fall due to increased productivity and technological improvements.
Whether the economy, price level, and money supply are deflating or inflating changes the appeal of different investment options.
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In 2007, real estate crashed completely with hundreds of thousands of homes going into foreclosure, multiple s

Lessons From the 2008 Housing Market Crash

We’ve all been warned: “Those who cannot remember the past are condemned to repeat it.”

But as the 2008 housing market crash fades into the rearview, it’s easy to forget that at one point, not all that long ago:

More recently we recall the third-largest housing boom in U.S. history, when homeowners across the country saw their properties make massive value gains starting in 2012. It’s easy to be bold and take risks when times are good!

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1. Don’t take on more house (or debt) than you can comfortably afford.

As a general rule, financial experts recommend spending no more than 30% of your monthly income on housing costs.
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2. Always keep an emergency fund for any surprise home repairs or maintenance.

While we’re talking budget…you haven’t accounted for all of your housing costs until you’ve factored in routine and unexpected maintenance. “Everybody should have an emergency plan,”

“Keep a little bit of extra cash on hand, because a lot of buyers get caught. They don’t think about the unplanned expenses. You might end up needing a new roof, a new HVAC, or some new appliances down the road.”

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3. Adjustable-rate mortgages are typically not your friend.

Leading up to the housing market crash, adjustable rate mortgages were peddled as an attractive “nontraditional option” and lured buyers in with “teaser rates,” which increase after a predetermined amount of time (anywhere from 6 months to 10 years, depending on the mortgage agreement)

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4. Do your homework on today’s ‘nonprime’ mortgages.

Even in today’s highly regulated mortgage market, when you set out to sell your home, you could go under contract with a buyer who has less-than-perfect credit. In the market’s recovery, “nonprime loans”— or loans made to borrowers that represent a higher risk of default—have emerged as a secondary market

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History of the Housing Market Collapse...

Timeline of Events for 2007

February: Freddie Mac announced that they were no longer buying the riskiest subprime.

April: Subprime lender New Century Financial Corporation files for bankruptcy.

June: Bear Stearns announced a loan of 3.2 billion dollars to help bail out one of its funds that invested in collateralized debt obligations (CDOs).

July: The stock market hit a new all-high over 14,000. On July 31, Bear Stearns liquidates two of its mortgage-back security hedge funds

August: A worldwide credit crunch had begun and there were no subprime loans available. Subprime lender American Home Mortgage files for bankruptcy.  This marked the start of the housing market crash

September: The Libor rate rises to its highest level since December of 1998, at 6.8%.

December: The stock market finishes the year at 13,264.

Timeline of Events for 2008

January 11: Bank of America acquired Countrywide financial for 4.1 billion dollars. Countrywide had a total of 1.5 trillion dollars worth of loans.

March 16: Bear Stearns on the verge of bankruptcy signs a merger agreement with J.P. Morgan to sell itself for $2 a share which was a fraction of the current trading price.

May 19: The markets had its final day above 13,000 closing at 13028.

September 6: The Treasury announced a takeover of both Fannie Mae and Freddie Mac that had over 5 trillion dollars in mortgages.

September 14: Bank of America signs a deal to acquire Merrill Lynch.

September 15: Lehman Brothers files for bankruptcy. The Dow drops 400 points closing at 10,917

September 17: The federal reserves lends $85 billion dollars to American International Group (AIG).

September 18: Fed Chairman Ben Bernanke and Treasury Secretary meet with Congress to propose a $700 billion dollar bailout. Bernanke tells Congress “If we don’t do this, we may not have an economy on Monday.”

September 26: Federal regulators seize Washington Mutual and then strike a deal to sell most of to J.P. Morgan for 1.9 billion dollars. This represents the largest bank failure in U.S. history.

September 29: Congress votes down the $700 billion bailout plan. That same day Citigroup acquires Wachovia.

October 1: The Senate passes the $700 billion bailout bill.

October 3: The house passes the $700 billion bailout plan and the president signs it into law.

October 6: The Fed announces that it will provide $900 billion in short-term loans to banks. The Dow closes below 10,000.

October 7: The fed announced that it will lend around 1.3 trillion dollars directly to companies outside the banking sector.

October 10: The Dow closes at 8451, the stock market has had its worst week ever losing 22% over the past 8 trading days or 8.4 trillion dollars from the market highs in 2007.

October 14: The Treasury taps $250 billion of the bailout fund and uses the money to shore up the nations top banks.

December 31: There were over 3 million foreclosures by this year. Florida, Arizona and California had rates of 4% with Nevada at 7.3%

The aftermath

Even though the financial crisis was resolved by the start of 2009 the housing market continued to decline throughout 2009. There were over 3 million foreclosure filings for 2009. Unemployment rose to over 10% and the housing market crash created the worst recession since the early 1980’s.

 By the 4th quarter of 2009, the U.S. has experienced significant GDP growth and corporate earnings had increased by over 100%. The Unemployment Rate had stabilized towards the end of 2009. By 2010 housing prices still haven’t gone up and we are still working on a surplus of housing inventory.

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