How does inflation depreciate your money?

Many people are well acquainted with such an economic term as inflation, but far few understand what it means and what benefits or harm the economy brings. The first and easiest answer of people to the question of what inflation is is the increase in prices for products, goods and services. This is not an exact definition, but it conveys well the general meaning of the word.

Inflation is a decrease in the purchasing power of money, in other words, the depreciation of a monetary symbol. The depreciation of money occurs both naturally, under the influence of economic factors within the country, and artificial, under the influence of the monetary policy of the Central Bank. Let's look at both cases:

1. The natural factors that influence the depreciation of money are the poor economic situation in the country, war, crisis and other problems.

In the first case, inflation rises on its own, as manufacturers are forced to raise prices for their goods to ensure payment of wages, loan payments and other operating expenses, including tax deductions. The increase in prices encourages one part of the population to refuse to buy expensive goods, the second part of the population makes them go into loans. To avoid price increases, the Central Bank raises interest rates on loans, making money expensive, which creates a currency shortage. In the end, enterprises continue to raise prices, people buy less, enterprises do not make a profit, pay a low salary, and the population cannot pay loans. And so in a circle as long as banks, enterprises and people become unable to pay taxes. The state is forced to take loans from other countries and in the end cannot repay them. There comes a default, in this state the currency of the country is worth nothing. A striking example of Venezuela, where the level of hyperinflation is so great that the cost of goods grows literally by the hour. The country's economy is literally one step away from a complete collapse.

In the second case, the state itself stimulates inflation, because there is high competition on the market and instead of raising prices for goods and services, sellers and manufacturers reduce them while fighting for the buyer. As a result, the profitability of such companies decreases, the state receives less tax deductions, which leads to a budget deficit and a crisis. In this case, the country is threatened by deflation, while inflation, on the contrary, is necessary as air. To stimulate inflation, the Central Bank lowers loan rates as low as needed to spur price increases. For example, the European Central Bank provides loans to commercial banks at 0%. In the USA it is under 0.25%, while in Switzerland and Japan the rates are completely negative: -0.75% and -0.1%, respectively. Getting cheap loans, people start spending more. Business gets higher profits, pays more taxes, and then people return loans and close the hole in the budget. In a word - both the wolves are fed and the sheep are intact.

As you can see, if in one case they try to restrain inflation, in the other they support it. Like it or not, but money either depreciates themselves, or the Central Bank helps them in this. The inflation rate of 2% per year is considered the best option when price increases do not scare away the consumer, and the economy develops and does not stand still.

As a result, it turns out that no matter what currency you use as a savings, it depreciates every year. Consider a simple example.

The average annual inflation rate of the Russian ruble since 2000 is 7.5%. The US dollar has an average annual inflation rate of 2%. The infographics below clearly demonstrate how the ruble and the dollar have depreciated over the past 20 years.

The result - the ruble depreciated by 79% and the dollar by 33.2%. Making a ruble deposit in a bank at 5% per annum, you won’t even beat inflation. Accordingly, in a couple of years, the invested 100,000 rubles will turn into 110,000 rubles. However, over these two years, a certain conditional product, which cost 100,000 rubles, will now cost 115,000 rubles. It turns out that you are impoverished by 5,000 rubles.

In 2020, the inflation rate in Russia will be higher than the average 7.5%, the COVID-19 pandemic is to blame. However, not only Russia, but all countries will have problems, but more on that a little later.

In fairness, it is worth noting that the Russian ruble is far from a record holder for inflation. History knows much more powerful depreciation of currencies not only in the post-Soviet space, but also in the world.

The collapse of the USSR and ruble inflation in the 90s

The USSR, in an effort to avoid inflation, built its economy on the following principle: total control and monopoly in all sectors by the state, low price of the final product and high raw materials, the absence of any competition led to the concept of hidden inflation, and after and hyperinflation. It all started after the implementation of economic reforms in 1980-1990. Cooperative and contractual prices appeared, and the private sector of the economy was legalized. This led to the fact that the state has less influence on pricing. In 1989, the state budget deficit arose for the first time, and in 1991 the USSR announced the inability of further price control. From 1985 to 1991, the country's gold reserves decreased from 2500 to 240 tons, and foreign debt grew 4 times. This was followed by the collapse of the USSR and the formation of the Russian Federation. The maximum jump in inflation took place in January 1992 - 245.3% per month. This was due to the elimination of the cash overhang that formed during the late USSR - financing the budget deficit through direct loans from the Central Bank. It was possible to overcome the consequences of economic reforms only in 1999, having survived the default.

Ukraine. Maidan, 2013.

November 24, 2013 - the revolution in Ukraine. President of Ukraine Viktor Yanukovych postponed the signing of an association agreement with the EU, thereby provoking a rally in Kyiv. The meeting grew into a long confrontation, the consequences were dire - the political and economic crises in Ukraine. Independent republics appeared, the Crimean Peninsula seceded, and a civil war broke out. All these events could not pass unnoticed for the national currency of Ukraine - the hryvnia. According to the official data of the State Statistics Commission, in October 2013 the country experienced deflation at the level of 0.1%, however, exactly one year later, inflation was raging 19%.

Ukraine. 1993 hyperinflation

In 1991, Ukraine became a completely independent country, but the Soviet ruble remained the country's currency. Ukraine could not issue the currency of another state, so in 1992 its own national currency appeared - reusable coupon-carbovans. Over time, the ruble disappeared from the country's cash flow, and coupon inflation began to rise. In 1992, the largest bill was 100 coupons, and in 1995 1 million coupons. People received salaries in packs, who had the opportunity, exchanged coupons for dollars. The exchange rate to 1 US dollar was 208 coupons in 1992, and after 4 years already 182 950 coupons.

The highest inflation rate was in 1993 and amounted to 10,000% per year. It was possible to put an end to hyperinflation only by the end of 1996. The president of the country issued a decree on monetary reform; a new national currency, the hryvnia, was put into circulation. Over time, coupons were taken out of circulation, exchanging for the hryvnia in a ratio of 100 to 1.

Hyperinflation in Zimbabwe

Founded on April 15, 1981, the African state of Zimbabwe immediately issued its own national currency - the Zimbabwean dollar, in denominations of 1, 5, 10 and 20 dollars. In the beginning, everything was going well, a young country was developing, and the national currency was confidently afloat. In the late 90s, Robert Mugabe (President of Zimbabwe from 1981 to 2017) began a policy of nationalizing the land. From the moment of its foundation, immigrants from Europe lived in the country and were engaged in agriculture, which was the basis of the country's economy. By order of the president, all white landowners in the country were taken away and transferred to the indigenous population. The problem was that the local blacks did not understand anything in both business and agriculture. Soon, essential goods began to disappear from store shelves, starvation and unemployment began. In the country, drug cartels began to flourish, for which local residents worked, because there they paid in US dollars. In 2001, the Zimbabwean dollar inflation rate exceeded 100%, and in 2008 it reached record levels of 231 million percent. Since the beginning of the reforms, Robert Mugabe, the country's Central Bank continued to issue new banknotes, a larger denomination. The Zimbabwean dollar was denominated 3 times: in 2006, 2008 and 2009. In the last denomination, the national currency was abolished, the common currencies in the country are the American dollar, euro and Chinese yuan.

Germany after the first world war

At the end of the war, Germany had to rebuild the military industry, provide jobs for soldiers, and pay off external debts. In addition, Germany was recognized as the culprit of the military conflict, it was imposed strict conditions of peace, they included compensation for material damage to all the affected countries. During the war, regular emissions of the national currency, the mark, were made to pay all of Germany’s allies. Before the start of World War I, the total number of banknotes in circulation was 7 billion. After the war, this figure increased 10 times. Of course, the brand began to depreciate. Prices in the country increased 3 times a day, and a month thousands of times. On average, brands per day depreciated by 25%. New banknotes were issued with an increased denomination twice a week, but this did not help the situation. For comparison: January 1, 1920, 1 dollar was worth 50 marks, November 15, 1923 - 4.2 trillion marks. They managed to stop hyperinflation at the end of 1923, through monetary reform. Rental brands were introduced, which were secured by real estate bonds. New brands changed to old, at the rate of one to a trillion.

Pandemic COVID-19

Of course, quarantine cannot pass unnoticed by the global economy. Back in March 2020, the damage from restrictions caused by the coronavirus was estimated at trillions of dollars. According to the Ministry of Economic Development of the Russian Federation, inflation this year will be up to 4.5%. A rather optimistic forecast, according to many respected Russian analysts. Preliminary data for Italy, France and China say the following: the decline in GDP for 2020 will vary from 25% to 40%, and this is 5-10% per quarter. This is a huge drop in global GDP, about 10%, in the case of continued bans due to quarantine. The US unemployment rate may rise by 25-30%, as during the Great Depression, only in a short time. Governments and central banks will continue to use issuing opportunities to cover the income of citizens, enterprises, as well as to combat COVID-19. The countries whose national budget was replenished by the tourism industry — Turkey, Egypt, India and others — will suffer most. The entertainment industry and standard educational institutions have to start all over again after quarantine cancellation or go online. Airlines will certainly be supported by states, in view of the ban on air traffic between cities and countries. Demand for fuel will decrease markedly, whatever the parties to the OPEC + deal would agree on. Continuous production will continue to function properly, but this is a small percentage of the total mass of companies and enterprises that cease to conduct their activities, temporarily or completely. Countries around the world have either allocated or are preparing to allocate funds to support the country's domestic economy. If countries do not, inflation can be replaced by rallies, which will contribute to the spread of coronavirus and the unstable situation in the country.

Countries that have already taken measures to stimulate the national economy:

USA

On March 25, 2020, the US Senate and the White House agreed on a $ 2 trillion aid package. They will be aimed at helping workers and businesses affected by the coronavirus.

On March 18, 2020, the Council of the European Union announced the allocation of € 37 billion to help workers and enterprises. A € 750 billion program has also been launched to repurchase securities in order to maintain the country's financial stability. March 23, 2020, for the first time in history, the Stability and Growth Pact was suspended to support the economy during a pandemic.

United Kingdom

On March 17, 2020, the UK Ministry of Finance launched a business support program, companies will be provided with loan guarantees of $ 400 billion (£ 330 billion) and will increase the maximum loan amount to $ 6 million.

Germany

On March 23, 2020, the government adopted a package of assistance for entrepreneurs and companies, as well as those groups that may be affected by the effects of coronavirus. The total assistance package is € 750 billion.

Italy

On March 11, 2020, the Italian Council of Ministers allocated € 25 billion to support the public and companies in emergency situations. € 3.5 billion has also been allocated to finance the health system.

On March 17, 2020, the Spanish government allocated € 200 billion to combat coronavirus and its consequences.

On March 18, 2020, Prime Minister Mateusz Moravecki signed a decree on the adoption of an aid package, which amounts to € 46.2 billion (212 billion zlotys).

France

On March 21, 2020, the French government allocated € 45 billion to help enterprises and workers who became partially unemployed.

Brazil

On March 16, 2020, the Brazilian government approved a set of measures to support the economy. The amount of allocated funds is $ 30 billion (150 billion reais).

Australia

On March 22, 2020, the Australian government approved a package of economic measures in the amount of $ 50.5 billion (82.6 billion Australian dollars).

China

On February 3, 2020, the People's Bank of China provided additional liquidity to the markets in the amount of $ 170 billion (1.2 trillion yuan).

On March 24, 2020, the republic’s authorities introduced financial assistance to businesses in the amount of $ 80 billion (100 trillion won).

Turkey

On March 20, 2020, Turkish authorities approved a package of economic measures to support small and medium-sized businesses, as well as citizens of the country. The amount of approved funds is $ 15.3 billion (100 billion lire).

On March 22, 2020, the state allocated $ 34 billion (126 billion dirhams) to support the national economy. In addition, the country's Central Bank has the right to issue loans to private banks at a zero interest rate to increase credit potential.

Egypt

On March 22, 2020, President Abdel Fattah al-Sisi approved a package of economic measures to finance the crisis response plan. Amount of approved funds - $ 6.4 billion (100 billion Egyptian pounds)

Conclusion

According to the data presented above, a very disappointing result can be summed up. A coronavirus pandemic could be the reason for the first ever global inflation. Any savings, regardless of the currency and interest that the bank offers, will depreciate, but how much is still unknown.

With the right approach to supporting enterprises and the population, and not as in the case of Zimbabwe, inflation will be substantial, but it will not grow into hyperinflation. The global economy will recover in the next 2-3 years, it will be a difficult process for each state, but promptly taken measures will avoid serious consequences in the future.

I would also like to say about the American dollar. The right to issue dollars is owned by 12 US banks that are members of the Federal Reserve System. It is noteworthy that the Fed does not belong to the United States, but to the country's largest financial groups. That is, when conducting a new issue to maintain the national economy, the United States does not just issue funds, but takes them on credit from one of its main lenders. In this regard, the opinion was formed that due to the coronavirus pandemic, the US will have an even larger public debt than before.

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