Everything You Need To Know About Money, Inflation | How The System Works | ENDEVR Documentary

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Inflation rates vary globally, with hyperinflation exceeding 50 percent per month caused by factors like war, isolation, or natural disasters. The measures taken by governments to control hyperinflation often lead to a loss of public trust in the economy and a collapse of currency value.

Insights

  • Hyperinflation is a severe economic condition where a country's inflation rate exceeds 50% per month, often triggered by factors like war, isolation, or natural disasters. This leads to a collapse in currency value as governments print more money due to reduced tax revenues, ultimately resulting in ineffective measures to control inflation.
  • The transition from the gold standard to fiat money allowed for increased debt issuance and money supply, impacting the dollar's value. Critics argue that the Federal Reserve's actions, such as buying bonds and cutting interest rates, risk endless money supply and inflation. Despite concerns over growing debt exceeding GDP, the market's confidence in the government's financial capacity remains strong.

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Recent questions

  • What is hyperinflation?

    Hyperinflation is a severe economic condition where a country experiences an extremely high inflation rate, typically exceeding 50 percent per month. This rapid increase in prices for goods and services can lead to a loss of confidence in the currency, economic instability, and a collapse of the monetary system.

  • What are some causes of hyperinflation?

    Hyperinflation can be caused by various factors such as war, isolation, natural disasters, reduced tax revenues, and excessive money printing by the government. When a government prints more money to cover expenses without the necessary revenue, it can lead to a cycle of inflation that spirals out of control, resulting in hyperinflation.

  • Which countries have experienced hyperinflation?

    Several countries have faced hyperinflation throughout history, including Greece, Germany, Yugoslavia, Zimbabwe, and Hungary. These instances of hyperinflation were often triggered by specific events like wars, economic destabilization, international sanctions, and excessive money printing to finance operations.

  • How does the Federal Reserve impact the money supply?

    The Federal Reserve can influence the money supply through various measures like buying bonds, which injects money into bank reserves, increasing the overall money circulation. Open market operations, where the Fed cuts benchmark interest rates, can also boost borrowing and further impact the money supply.

  • What are the consequences of transitioning back to the gold standard?

    Transitioning back to the gold standard poses challenges such as limited monetary policy flexibility, potential economic impacts, and environmental damage. While the gold standard can restrict credit generation and debt monetization, returning to it may have far-reaching consequences on the economy and financial systems.

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Summary

00:00

Understanding Hyperinflation: Causes and Consequences

  • Inflation is the rate at which prices for goods and services rise, with a low inflation rate being typical globally.
  • Hyperinflation occurs when a country's inflation rate exceeds 50 percent per month, often due to factors like war, isolation, or natural disasters.
  • The road to hyperinflation involves reduced tax revenues, leading to the government printing more money, which then impacts government revenues and causes high inflation.
  • Hyperinflation usually follows a chain of events, with the government resorting to ineffective measures to control inflation, resulting in a collapse of currency value.
  • Cases of hyperinflation were rare before the First World War, with modern instances being more prevalent, such as in Greece, Germany, Yugoslavia, Zimbabwe, and Hungary.
  • Greece experienced hyperinflation during the Second World War due to high expenses supporting the army and a policy of paying with gold sovereigns, leading to a loss of public trust in the economy.
  • Germany faced hyperinflation during the Weimar Republic, with prices doubling every 3.7 days, caused by colossal pre-war debt, printing money to pay debts, and economic destabilization post-World War I.
  • Yugoslavia's hyperinflation in 1994 saw a 313 million percent inflation rate, resulting from disintegration, international sanctions, and illegal credit provisions by regional central banks.
  • Zimbabwe's hyperinflation in 2008 reached 79.6 billion percent, stemming from land reforms, droughts, international criticism, and excessive money printing to finance operations.
  • Hungary holds the world record for hyperinflation post-World War II, with an inflation rate of 4.19 quadrillion percent in July 1946, caused by war damage, reparations, and excessive money printing.

17:24

Federal Reserve's Actions and Economic Implications

  • When the Federal Reserve buys one trillion dollars in bonds, it injects the same amount into bank reserves, increasing the money supply.
  • The Fed must pay its profits from bonds to the treasury, which then pays interest on the bonds, creating a profit that goes back to the government.
  • Open market operations by the Fed involve cutting benchmark interest rates to boost borrowing and increase money circulation.
  • Critics view these measures as loopholes leading to an endless money supply, risking inflation and economic collapse.
  • The Fed's balance sheet grew from 4.1 trillion to 7.5 trillion dollars, showing extensive action during crises.
  • Fiat money like the dollar has no limits on issuing debt, allowing the Fed to buy bonds and supply more money, affecting the dollar's value.
  • The gold standard limited credit generation, but leaving it led to increased spending, debt monetization, and economic decline.
  • Nobel laureate Paul Krugman believes the Fed's actions are not harmful, citing low inflation post-2008 crisis.
  • The US's growing debt, exceeding GDP, raises concerns, but the market's lack of worry indicates confidence in the government's financial capacity.
  • Transitioning back to the gold standard poses challenges like limited monetary policy flexibility, potential economic impacts, and environmental damage.

31:59

"From Gold Standard to Dollar Dominance"

  • After the crash of 1929, investors turned to trading commodities in currencies for safer investments.
  • The price of gold surged, leading to hoarding in the United States, impacting the country's gold reserves.
  • In 1933, President Franklin Delano Roosevelt issued an executive order banning hoarding, followed by the Gold Reserve Act in 1934.
  • The Gold Reserve Act necessitated individuals to retain only $100 worth of gold, returning the rest to the state.
  • This act led to the establishment of the Fort Knox reserves in Kentucky in 1936, housing 143 million ounces of gold.
  • In 1944, representatives from 44 countries convened at Bretton Woods to organize the post-war monetary system.
  • The International Monetary Fund and World Bank were conceived at this event, with the U.S. advocating for fixed conversion rates tied to gold.
  • By 1959, countries adhered to fixed exchange rates relative to the dollar, pegged at $35 per ounce of gold.
  • The surplus of dollars in the 1960s, due to foreign aid and military spending, strained the U.S.'s ability to maintain the gold price at $35.
  • In 1971, President Richard Nixon halted the convertibility of dollars to gold, leading to the abandonment of the gold standard and the end of the Bretton Woods agreement.

46:57

"Zombie Companies: Impact on Economy and Solutions"

  • Zombie companies, which are unprofitable firms kept alive by loans, have negative impacts on the economy by reducing productivity and investment by healthy companies. The term originated in the 1980s and gained popularity in Japan during the 1990s, leading to a lost decade of economic stagnation due to banks propping up insolvent businesses.
  • Governments, especially during extreme situations like the pandemic, provide support to struggling companies through loans and furlough schemes. However, experts warn that prolonged assistance can be counterproductive, advocating for a focus on helping workers and allowing non-viable companies to fail quickly to prevent zombification of the economy.
  • The European Union, despite providing substantial financial support during the pandemic, faces the challenge of distinguishing between viable and non-viable companies to prevent the rise of zombie firms. The EU must carefully manage loan options to ensure support for sustainable businesses while avoiding the perpetuation of unproductive entities.
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