The World Bank Lebanon Economic Monitor for Spring 2021 is subtitled “Lebanon Sinking (To the Top Three).” The reason for that somewhat cryptic title is described in the opening lines of the report:
The Lebanon financial and economic crisis is likely to rank in the top 10, possibly top three, most severe crises episodes globally since the mid-nineteenth century … [when] contrasted with the most severe global crises episodes as observed by Reinhart and Rogoff (2014) over the 1857–2013 period. In fact, Lebanon’s GDP plummeted from close to US$ 55 billion in 2018 to an estimated US$ 33 billion in 2020, with US$ GDP/per capita falling by around 40 percent. …
Overall, the World Bank Average Exchange Rate (AER) depreciated by 129 percent in 2020. Exchange rate pass through effects on prices have resulted in surging inflation, averaging 84.3 percent in 2020. Meanwhile, the stock of currency in circulation increased by 197 percent, even as broad money supply (which includes bank deposits) declined, with the latter weighed down by deleveraging in the financial sector.
There’s a lot to be said here about the dramatic rise in poverty and unrest, with implications beyond economics for political conditions in the Middle East region as a whole. Here, I want to focus on what happens when a society is faced with extremely high inflation rates.
Here, I’ll focus on an essay by Paul Wood, “What happens when your currency collapses? The Lebanese are living through a terrible economic experiment” (Spectator World, June 23, 2001):
The Lebanese currency has lost more than 90 percent of its value over the past 18 months and is continuing its steady decline. It would be foolish to keep more than a few days’ spending money on hand, so everyone has a moneychanger. Mine is Mohammed, who pops round on his moped with ever-fatter stacks of notes with ever more zeros on them. The currency grows physically as it shrinks in value. He passes over a wad of cash and says, smiling: ‘Our leaders are stupid and corrupt.’ That’s true, but only part of the story of what has gone wrong.
Mohammed is here because no one uses the banks to change money anymore. That would be crazy when the official exchange rate is still 1,500 lira to the dollar, one-tenth of the black-market rate of just over 15,000 to the dollar (at the time of writing). Mohammed used to be a chef, a job where he made things that people wanted, adding a small but tangible amount to the nation’s wealth. Now he’s one of thousands of people employed in the completely useless but absolutely indispensable business of ferrying stacks of printed paper back and forth by moped, to make up for the catastrophic failure of the banking system. It’s one small example of the inefficiencies that creep into an economy when you can’t trust the money anymore.
Wood has the kinds of stories you expect to hear in this setting: long lines forming for basic goods like food and groceries, taking a literal backpack full of money to the hospital to buy prescription drugs, and so on.
The point I would emphasize here is that when there is inflation at more than negligible levels, people and firms do need to worry about it. You need to worry if your paycheck is keeping up. Firms need to worry about price increases from their suppliers and raising prices to their customers. Borrowing money becomes fraught: Will your interest rate adjust and soar with additional inflation? The energy going into keeping pace with inflation is energy diverted from actual productive pursuits: education and learning skills, investing, cutting costs, research, and more.
For some previous examples from the last decade of nations coping with hyperinflation, interested readers might begin with For those who want more, here’s an earlier discussion of “Hyperinflation and the Venezuela Example” (April 28, 2016). Here’s a discussion of “Hyperinflation and the Zimbabwe Example” (March 5, 2012). Or for an historical list of such episodes, see “58 Episodes of Hyperinflation (Venezuela is #23)” (February 2, 2019).
From a little further back, one of the most succinct explanations of inflation and short-termism that I know appeared in an essay written back in 1992 by V.S. Naipaul, called “Argentina and the Ghost of Eva Peron,” in which Naipaul purportedly quoted “Jorge” on the situation of hyperinflation in Argentina. Here, I’m quoting from the essay as reprinted in the 2003 collection of Naipaul’s travel writing, The Writer and the World.
Another aspect of inflation is that you cease to worry about productivity and even technology. Now, that is the secret of all progress: productivity. But you really can get no more than 3 or 4 percent per annum improvement in productivity anywhere in the world. With inflation like ours you can get 10 per cent in one day, if you know when and where to invest. … It is much more important to protect your working capital than to think about long-term things like technology and productivity–although you try to do both. So capital investment in Argentina is not even covering wear and tear. In short, when the current plant reaches the end of its working life there won’t be a provision built up to purchase new capital equipment. This is the inevitable result of inflation, which is the monetary disease. Your money is disintegrating. It’s like cancer. You live day to day. That’s all you can do when you have inflation of more than 1 per cent per day. You cease to plan, You’re just happy to make it to the weekend.