Covid-19 proved to be not only a great threat to citizen’s health but also a real threat to every economy on the globe. What we’re currently seeing, is the struggle in almost every country, and the fear of hyperinflation. The expert on the topic, Steve Hanke argues and claims that there are some preservative measures (although they are rather radical), that could be implemented.
Hanke, who is an applied economics professor at Baltimore’s Johns Hopkins University, believes that the most efficient way to eliminate the hyperinflation possibility is to ‘mothball’ central banks in the developing countries, and find a place for them in the museums.
He presents the two options for developing countries. This is either to use some foreign currency, and operate with it, and not the local, previously used currency. This process is called ‘dollarization’, and to be honest it is nothing new in the world. As of today, as many as 37 countries are using this method, Montenegro being the prime example of that (this example is important, as Hanke was helping to conduct the process in 1999).
The second option is to issue their local currency with the use of a currency board. This would mean fixed trade rates with some other sound currency. In this case, this other currency is called the anchor one, and the local currency is being fully backed with the reserves of the sound currency. Basically, we’re cloning the sound currency and implementing it in another market.
Why should we trust Hanke?
Professor Hanke was actually an architect of some financial successes over hyperinflation in post-USSR countries. He helped Estonia, Bulgaria, Bosnia-Herzegovina, and Lithuania overcome their troubles. He was also an adviser to the government of Yugoslavia in 1990.
To read about his successes in Europe, as well as his view of the future, use the following link and access the Disruption Banking piece: https://disruptionbanking.com/2021/05/06/steve-hanke-currency-boards-are-needed-to-quash-hyperinflation-risks/.