Posted by Frugal on 31st May 2006
Do you know what it is like to experience an inflation of 100000% in four years? Oh no, I did not mis-type the number of zeros. It’s 100000% or 1000X in four years, or 562% in 1 year, or 1.4% daily. It sounds crazy, but that was in the late 1980, once when I lived in a Latin America country.
When I first arrived at the country, the government just crossed out three zeros in their currency bill. The numbers were getting too big that you often needed to buy things using a million dollar bill (I bet you can be a millionaire at 11 if you lived in that country). So their government figured that they will cross out 3 zeros in the old paper money, and gave the new currency bill a new name. Let’s called it the new peso for the purpose of this article. The very first month when I took the bus, I was paying about 30 cents of new peso for the bus fare. Gradually, the bus fare increases to 40 cents, 60 cents, 1 dollar, 5 dollar, etc. The price hike of everything was pretty much constant and endless. For the local residents (and I), it was just part of life. And for all wage earners, they would immediately spend all of the money to stock up on consumer goods, or else they risked losing major purchasing power. No one saved money in the local currency or in the bank. If there was any savings, they needed to be in foreign currency or local physical goods.
There were two friends of my father’s over there in this country. One opened a laundry store. Another opened a small grocery store. Because of the constant inflation, pretty much at the end of everyday, they exchanged all of their local currency for US dollar in the black market. Every couple of days, they needed to re-adjust all the pricing. If they didn’t adjust the prices, pretty soon they couldn’t even recuperate their costs. The inflation was not constant throughout the year, but average about 10% every week. So prices of everything needed to go up by 10% every week on the average. It was simply incredible. Obviously, for the merchants to anticipate the inflation, they simply sold the goods at even higher than inflated price so that they wouldn’t run the risk of selling below cost.
One time my mother took the bait of opening a certificate of deposit in a local bank in local currency. The interest rate if I remembered correctly was 30% for one month. So she took the US dollar and exchanged for local currency, and opened the bank CD for 1 month. After 1 month when she exchanged back to US dollar, I remembered that she lost some 5% of the money. Sounded like a good deal at 30%? Well, there is always some reasons for a too-good-to-be-true deal.
By the time when I was leaving this country after 4 years of living there, I was paying 300 new pesos for the bus fare. Compared to 30 cents just 4 years ago, the bus fare had increased 1000 times. Yes, 1000 times. And interestingly, the government crossed out three zeros again on all the paper bills right after I left the country. I guess the factor of 1000 seemed to work well for them.
Note: I changed some of the details to hide my identity, but I have tried my best to leave most of the details as they were. If/when you comment, don’t bother mentioning the name of this country. I will edit them out to make this post less conspicuous to my close friends. Thanks for your cooperation.