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Saturday, January 9, 2010

Economics Makes A Hash Of North Korea's "Currency Reforms"

It is another year, and it is yet another ignorant dictator's turn to unleash the wrath of Economics on his subjects! This time, it is the turn of North Korea's Kim Jong Il.

First, a little background: On November 30 of last year, North Korea's Dear Leader, Kim Jong Il, announced a currency reform. The main part of that reform was the issue of new currency, with 100 units of the old currency being equal to one unit of the new currency. As part of the program, all old currency was to be exchanged for the new currency. The old currency would be abolished and made worthless.

Strict limits were put in place for how much old money could be exchanged for the new currency. The initial limits were equivalent to about $40 (unless you could show some legitimate justification for higher accumulation for the old currency), but these limits were relaxed in several steps because of widespread public discontent and protests. The current limits stand at about $200.

The currency reform also prohibited the possession of foreign currency.

The currency reform is part of an aggressive crackdown on free markets by North Korea. You see, North Korea's government-run food distribution programs are so inefficient and useless that UN officials now estimate that half the calories consumed in North Korea now come from food bought in private markets. And the people who have facilitated this black market have gotten relatively rich on the profits from this trade.

The introduction of the new currency was aimed at making these profits worthless for the traders who held on to their profits in the old currency or changed it to foreign currencies, rather than using them to buy and hoard hard goods.
New North Korean Currency
Unfortunately, Kim Jong Il demonstrated his ignorance of economics when the currency reform also included a provision where the salaries of workers in the new Won (which should have been one-hundredth of what they had been in the old Won since one hundred of the old Won were equivalent to one of the new Won) continued to be at the same rate as before. Effectively, everyone in the country got a 100-fold pay raise all at once!

Excellent news, right? Who wouldn't want a 100-fold raise right now? Unfortunately, economics does not work that way. The supply of goods and services that people could buy using the money was limited to what it was before the currency reform. But the currency reform flooded the country with 100 times more currency to chase after these goods and services. Kim Jong Il should have spoken to Robert Mugabe about what happens to prices when more money chases after fewer goods: massive, runaway inflation!
New North Korean Currency
In addition to rampant inflation, the "reform" has had other effects. Since the new currency is still in the process of finding its right value against currencies like the Chinese Yuan (North Korea imports most of its essential goods like food and fuel from China), traders have stopped selling goods, and are hoarding them. This has led to severe shortages of food and other essentials, further fueling inflation and uncertainty.

People who don't believe in economics, capitalism or the markets develop their own simplistic and, often, stupid world-views that blinds them to the actual effects their policies have on the real economy. Luckily, most of these ignoramuses never get to create policy, they only get to make stupid movies like "Capitalism: A Love Story", so we are reasonably safe from these madmen.

But there are a few like Robert Mugabe and Kim Jong Il who do have the power to unleash their ignorance on the suffering masses in their countries. And like all good idiots, the more they ruin their countries, the more they are convinced that their policies are correct, and it is outside interference that is causing problems.
New North Korean Currency
Of course, it also helps that these people don't have to suffer the true consequences their policies. They live in heavily guarded palaces with all their needs and wants, and a lot more, taken care of. That gives them time and energy to cook up more hare-brained schemes to foist on their poor subjects.

As for the subjects - well, this is what happens when you are in the wrong place at the wrong time, I guess! As for me - I would rather be ridiculed for being a fan of Ayn Rand than be ridiculed for not knowing the basics or economics. I would rather be pilloried as a heartless capitalist than be pilloried as a brainless dictator responsible for ruining entire countries and the lives of generations of people!

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