How to stop hyperinflation?
A stable monetary system is the most crucial problem for the prosperity of every country. Hyperinflation is one of the factors that can destroy it. It may appear in any country after a war or political and social turmoil. It can really make life difficult. Citizens lose confidence in the stability of their country’s currency because there is too much money on the market that is not supported by the increase in the production of products, goods and services.
In the 20th century hyperinflation occurred very often. Here are some examples in a chronological order: Russian Federation (1921-1922), Germany (1923), Greece (1944), Hungary (1945), China (1948-1949), Bolivia (1984-1986), Brazil (1986-1994), Poland (1989-1991) and Bosnia and Herzegovina (1993).
The size of hyperinflation is determined by the average increase in percents of prices of all products, goods and services on the market at a given time. Let’s suppose that in a given country the monthly hyperinflation is 100%, and at the beginning of the month a hypothetical company sells a chocolate bar for 120 monetary units with the production costs of one bar 100 monetary units. After one month, it will turn out that the unit cost has increased to 200 monetary units. In this situation, the company must raise the price of the product to 240 units to cover costs and achieve the same profit value. This situation applies to all products, goods and services on the market. A vicious circle of hyperinflation is created.
Countries with a capitalist system are the best at securing proper life for their citizens. The key is economic competition on the market. At this moment there is one country with hyperinflation. High inflation is in many countries. My method of eliminating hyperinflation (or inflation) is as follows. The maximum prices of goods and services of direct consumption on the market should be determined for a specific moment in the future. Every product is a commodity so we are taking into account only goods and services. These maximum prices can’t be exceeded either before or after the mentioned moment. Do not be afraid. This has nothing to do with the communist approach. After completing the process of eliminating hyperinflation, it will be possible, but not necessary, to depart from these set maximum prices. Goods and services of direct consumption are divided into groups. Here they are: clothing, energy and water, food, house equipment, household articles and small items, materials for house building and things for its using, means of transport, personal hygiene and cosmetics and selected services. A special formula is used to determine prices, but about that in a moment. As I have mentioned, we set the maximum prices for the future first. Then we allow the market to reach these prices. For example for five months. What’s the most interesting and the most important will happen before the end of this process. Let’s examine exactly what will happen on the example of three drawings. The first describes the starting situation (January), the second describes the situation in which hyperinflationary forces operate (February) and the third describes the situation in which hyperinflationary forces are suppressed by setting maximum prices for all consumer goods and services on the market at a given time in the future (also February). We are considering a simplified situation. We are limiting costs to materials. The produced car consists of four types of parts: wheels, seats, an engine and a body. These four elements form all the costs associated with the production of a product unit. In the situation under consideration the monthly hyperinflation is 100%.
The first picture describes the situation from January. The price of materials taken together is 50 thousand. Thus the cost of producing a product unit is 50 thousand (red colour). The company has set a margin of 10 thousands (green colour). This margin is 20% of the cost value.
Let’s now see in the second picture what hyperinflation forces will do with the production cost of one car in February. The costs will increase by 100%. They will reach 100 thousand (red colour). The company will have to set the margin at twice as high level as in January to achieve the same real value in money. The margin will be 20 thousand (green colour). When the cost of a car reaches 100 thousand, the prices of materials will already be in the process of further growth (red arrows).
Let's look at the third picture. It also refers to February but in the situation of applying maximum prices for consumer goods and services. By affecting the prices of consumer goods and services, we influence the prices of all goods and services. For a car (a consumer commodity) there is the maximum price but not for the parts (materials). There are many companies on the market that produce wheels, seats, engines and bodies. They are competing with each other and know that in a month (at the end of February) they will not be able to raise the prices of their goods, because the maximum price is set for the consumer commodity, like already mentioned car (120 thousand). The prices of materials taken together can’t exceed the cost limit, which is 100 thousand. The company wants to achieve a reasonable profit. The cars producer will raise prices at a lower and lower rate because it knows that can count on the fact that companies from which it purchases materials will also not raise prices at the current rate. This rate of declining growth will reach zero growth and the process of growth of prices of consumer and non-consumer goods and services will be stopped because prices of consumer goods and services will reach the set maximum level. Gradually less and less intense red colour means reaching maximum prices.
It can’t be that with the set maximum price of the car, the value of all costs of this commodity will reach higher value than the maximum price. On the free market, no one will be able and no one will want to pay for consumer goods and services more than the set maximum price. The car manufacturer will negotiate prices with the suppliers of materials. No company will pay more than it can, to not exceed the maximum cost limit and to achieve at least minimal profit through a minimal margin. The maximum prices of consumer goods and services do not specify a minimum or maximum share of the margin in these prices.
In a healthy economy cash flows quickly. When in a country eliminating hyperinflation, someone will not raise the price of a commodity or service as much as others, they can be sure of increasing turnover. More customers will be willing to buy this cheaper commodity or service from them.
The formula for determining maximum prices is based on the use of prices of goods and services of a country which does not have hyperinflation or on historical data. It allows to settle proper proportions between prices. There is no other option. It is impossible to determine prices properly on the example of a country that has hyperinflation. Prices can change even every few days. There is no point in time at which all prices can be determined.
The formula has the following form: (a × b) × c = maximum price. The brackets have been used for easier understanding of the formula.
The “a” number is the maximum monetary value for every one consumer commodity and service on the market of the country from which we use prices to establish prices in the country eliminating hyperinflation. It is different for every commodity and service. It presents a value equal to the maximum price in the country that lends prices. For example, when the maximum price of a shirt in the country that lends prices is 4 units, its “a” number in the country with hyperinflation will also have 4 units. The “a” number is specific for every commodity and service. All “a” numbers are the only variable numbers in the formula.
The “b” number specifies the conversion rate for the currencies of the countries concerned (the lending country and the country that eliminates hyperinflation). It is necessary to apply the average exchange rate resulting from the purchase and sale rates in order to convert the maximum value of prices on the lender’s market to the maximum value of prices on the market of a country that wants to get rid of hyperinflation. The lending country should be culturally and geographically close to the country with hyperinflation. Let’s suppose that there is hyperinflation in Poland and it is decided to use maximum prices in Germany which has the Euro currency. Let’s also assume that the relation of Euro to zloty according to the average exchange rate is 1:1500. In this situation, a commodity or service with the maximum value of 4 Euro in Germany will be worth in Poland 6000 zloty. b = 4 × 1500 = 6000 The “b” number is fixed for a specific project.
The “c” number creates a multiplication of the a × b price for the future. It is calculated according to the formula: c = (1 + r) m where “r” is the monthly value of hyperinflation, and “m” is the number of months forward, that is the time distance between the present and the moment on which we set maximum prices in the future. For example, if the monthly hyperinflation value is 50% and the value of “m” is 5 (that is, the starting point for example is 01.01.2020 and the point of setting the maximum price is 01.06.2020) then c = (1 + 0,5) 5 = 7,593. The “c” number is fixed for a specific project.
Let’s look at the example in which the price of the commodity in the lending country is a = 4, the conversion rate for the currencies of the countries interested is b = 1:1500 and the “c” number is determined by the monthly hyperinflation value of 50 % and by the 5 months distance: (a × b) × c = maximum price. (4 × 1500) × 7,593 = 6000 × 7,593 = 45 558
The most important is that there are proper differences among the prices of goods and services. These differences are formed by “a” number as the only variable value. The maximum price of flour as a material must be lower than the maximum price of a loaf of bread to make it profitable to bake bread (a consumer commodity) for sale.
A very good rule for using the services of banks and insurance companies during the elimination of hyperinflation would be to make contracts only for short periods of time, for example one month.
For the implementation of my method, a list of all consumer goods and services is needed. It should be given to every citizen. On the right side of every record there will be given the quantity unit for which the maximum price must be paid and the maximum price.
Names of some goods are repeated. Therefore, they are listed in a separate group so that there is no difficulty in determining one maximum price for every matching. Every country can have its own specific goods and services. That's why changes on the list may be needed.
If in the country lending prices there is no custom to impose the purchase of additional commodity or service when buying a particular commodity or there is no custom to impose the purchase of additional commodity or service when buying a particular service, such imposition is prohibited in a country that eliminates hyperinflation.
When you are building a house, you do not only pay for materials. Construction services may be a higher cost. A construction service is one of a few selected services given on the list.
If the entry on the list includes a group of goods, the maximum price applies, of course, to the most expensive and the best of them. The seller decides about the prices of the rest of goods according to their knowledge about the market. The same applies to services. It will be psychological and economic factors which will determine the prices. All sellers must be aware that they have competition.
It may happen that a commodity description will be insufficient and will need support in the form of a photo. You will find it on the internet. It is important that during the elimination of hyperinflation, every consumer commodity and service on the market should have visible the maximum and the current price. The rule should be that the maximum price will be over the current price.
The prices of similar goods and services and the prices of the same goods and services, but of other companies, influence each other. The price of a commodity and a service is influenced by its quality, the selling place and the way of promotion creating the image.
Many goods have a lot of components. For example: a car, a computer or a dishwasher. It can be difficult to write down all parts and then add prices to them. The seller should be left with the decision about the prices of the parts. All the goods will be on the list and will have fixed prices. A reasonable price of the component must be derived from the maximum price of the commodity. If the seller determines the component price which is too high, the competition will use it and determine lower price and it will bring significant benefits. The customer will also come to buy another commodity. It will be psychological and economic factors which will determine the prices. All sellers must be aware that they have competition.
Regarding the maximum prices, it should be added that the market forces will decide where prices will reach the maximum and where they will be much lower. In the perspective of one country, prices of the same goods and services will certainly be higher in the capital city than in small towns and villages.
The greater the amount of goods or services sold to one customer, the lower the price per unit can be expected by the buyer. The smaller the amount of goods or services sold to one customer, the higher the price per unit can be expected by the seller. All that has to be done is to settle the maximum price of one commodity or service and you can derive the price of larger amount from it.
The method does not determine the maximum earnings of natural and legal persons operating on the free market. It only determines the maximum prices of consumer goods and services.
For the proper functioning of the method, it is necessary to determine the minimum salary. It should keep the social minimum for every working citizen. In another situation, even an effective determination of maximum prices for consumer goods and services will result in very low salaries, in particular for manual workers.
The state should help financially to those who want to start their own businesses so that the market will be as competitive as possible. It will result in lower prices and new jobs. It will be good for every country eliminating hyperinflation to have an institution explaining unusual and exceptional market situations regarding prices and competition. There will be reported incorrectly calculated maximum prices or lack of an important commodity or service on the list. Such situations will certainly appear especially in the first country using the method.
Prices of luxury goods should be stated by brand. For example: Ferrari 2 million Euro.
Steps of implementation of the method for one country:
The present situation is difficult because plenty of countries have inflation. In that case, at the same time, many countries should be involved in implementation because they are importing and exporting. The countries which are selling energy resources should be included as the first ones. Lack of proper agreement will make it difficult to implement the method.
It is also possible to implement the method by one country. In that case all export and import payments should be done in the currency of the country using the method. The currency of the country using the method will not lose it’s value because of respected maximum prices of goods and services of direct consumption (which in the future may be abandoned). The currencies of other countries will lose their value because of inflation present in these countries.
I believe that my method will give people a higher standard of living. It will allow you to enjoy your work without the inconvenience of hyperinflation.
Łukasz Nowak