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Real Money?

More Monopoly money is printed in a year, than real money printed throughout the world.

There’s toy money, imaginary money, worthless money and money created from ‘thin air’.

Firstly, the story of the economist and his buddies who tricked an entire country of 150 million people into saving their economy – with imaginary money!

Brazilian Cruzeiro bank note

The old Brazilian Cruzeiro

During the 1990’s Brazil’s inflation rate hit 80 percent per month. At that rate, if bread cost $1 one day, it will cost nearly $2 a month later. If it keeps up for a year, the cost is a staggering $1,000. Prices were changing daily.

The problem went back to the 1950s, when the government printed money to build a new capital in Brasilia and by the 1980s, the inflation pattern was in place. Over time, several Presidents were elected and the first task was to freeze prices and bank accounts but as each failed the Brazilian people became convinced that the government was helpless to control the inflation.

Edmar Bacha, an economist and his buddies from the Catholic University in Rio came up with a crazy, unlikely plan, and it worked!

This stroke of luck for Brazil only came about because in 1992, there was a new finance minister, who knew nothing about economics. He called the university and invited Edmar Bacha to meet him. This was a dream for Edmar and his friends, who had been studying Brazilian inflation since they were graduate students and had spent time complaining to each other that it was not being fixed.

Bacha was invited to meet the President who agreed that he could ‘try it his way’. “I asked for an autograph for my kids,” Bacha says. So the president wrote Bacha’s kids a note that said, “Please tell your father to work fast for the benefit of the country.”

The four friends explained their idea. You have to slow down the creation of money, but, just as important, you have to stabilize people’s faith in money itself.  People have to be tricked into thinking money will hold its value.

The four economists wanted to create a new currency that was stable, dependable and trustworthy.  The only catch: This currency would not be real. No coins, no bills. It was fake. “We called it a Unit of Real Value — URV,” Bacha says. “It was virtual; it didn’t exist in fact.”

People would still have and use the existing currency, the cruzeiro. But everything would be listed in URVs, the fake currency.  Their wages would be listed in URVs. Taxes were in URVs. All prices were listed in URVs. And URVs were kept stable – what changed was how many cruzeiros each URV was worth.

Brazilian Real currency

New Brazilian Real

Say, for example, that milk costs 1 URV. On a given day, 1 URV might be worth 10 cruzeiros. A month later, milk would still cost 1 URV. But that 1 URV might be worth 20 cruzeiros. The idea was that people would start thinking in URVs – and stop expecting prices to always go up. And after a few months, they began to see that prices in URVs were stable. Once that happened, Bacha and his buddies could declare that the virtual currency would become the country’s actual currency. It would be called the Real.

“Everyone is going to receive from now on their wages, and pay for all the prices, in the new currency, which is the Real,” Bacha says. “That is the trick.” The day they launched the real, Bacha says, a journalist friend asked him, “Professor, do you swear that inflation will end tomorrow?” “Yes, I swear.” Bacha said. And, basically, inflation did end, and the country’s economy turned around.

Since then Brazil’s success has been truly remarkable as a major exporter, with 20 million people lifted out of poverty. In just 20 years, Brazilians have gone from an absolute faith that their currency has no value to an absolute faith that its value will never change and to a solid and growing belief that Brazil is a next global power.

Hyper-inflation is not uncommon – the minimum rate required to qualify as hyperinflation (50% per month is equal to a 12,875% per year). The highest being Hungary in July 1946 with 195%, Zimbabwe 98% in November 2008 (the latest measurable), Yugoslavia 64.6% in January 1994, Germany 20.9% in October 1923, Greece 17.1% in November 1944 and China 13.4% in May 1949. (Source: Prof. Steve H. Hanke, 5th February 2009)

Zimbabwe's hundred billion dollar note

Zimbabwe 100 billion dollar banknote

Zimbabwe is the first country in the 21st century to hyper-inflate. In February 2007, its inflation rate topped 50% per month and since then inflation has soared. Foreign currencies replaced the Zimbabwe dollar in a rapid and spontaneous manner with the “dollarization” process being legalized in late January 2009, causing general consumer prices to stabilise again after years of hyperinflation and price speculation.

Ashes are all that is left of the Zimbabwe dollar — a remnant of paper money.  Its real value is tiny, its use is limited, and its value against the U.S. dollar is cut in half every two days.

Upon its release date in July 2008, the Zimbabwe 100 billion dollar banknote (equal to one US$), could purchase just 3 eggs.  In 2009, Zimbabwe printed a 100 trillion (1014) Zimbabwean dollar note, which at the time of printing was only worth about 30 US dollars.

The highest denomination banknote ever

The highest denomination banknote ever was the 1 billion trillion (1,000,000,000,000,000,000,000) Hungarian Pengő in 1946 and it was only worth twenty cents US!

Setting aside printed money – countries are now creating money out of thin air!

Have you wondered about the money that has been (and continues to be) pumped into the banks in the recent financial Crisis? Called Quantitative Easing, it’s the electronic equivalent of printing money. Quite simply, the central bank credits its own bank account with money that it creates out of ‘thin air’. This increases the supply of money by increasing the excess reserves of the banking system, generally through buying of the government’s own bonds.

What next?  Perhaps we should start spending our Monopoly money?

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