North Korea and Currency Devaluations

[Subdivisions]

Here's what just happened over in North Korea:

TOKYO -- Chaos reportedly erupted in North Korea on Tuesday after the government of Kim Jong Il revalued the country's currency, sharply restricting the amount of old bills that could be traded for new and wiping out personal savings.

...

The revaluation replaces 1,000 won notes with 10 won notes, but strictly limits the amount of old currency that can be exchanged, news reports said.

100:1.

You had $100,000, you now have $1,000.

You had $100,000,000 (one hundred million), you now have one million.

Oh, and if you tried to cheat by taking it out of the system, only $40 of it is exchangeable - the rest is worth nothing.

Yes, this is North Korea, and Kim Jung-Il isn't exactly a nice guy.

Now let's ask the question nobody wants to ask:

http://market-ticker.denninger.net/archives/1685-North-Korea-and-Currency-Devaluations.html

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Ouch! That had to hurt...

[Selatius]

1. If they simply wanted to eliminate excessive zeros, they did it wrong.

If the point was to eliminate excessive zeros while maintaining purchasing power, they should have simply allowed total freedom to exchange old bills for new. By limiting that, they essentially choked off everybody's savings.

Eventually, all currencies will face a similar situation. For example, one day due to inflation, a loaf of bread will cost $10, and sometime later, hopefully much later, it will cost $50 and then $100. Eventually, somebody in the US is going to say, "Why not introduce a newer currency that can be exchanged for the old currency where $1 of the new currency is equal to $100 of the old currency so that a loaf of bread will again be just $1 instead of $100?"

[Igel]

2. Not the goal.

It deflates the currency--then the government can re-inflate it, but with the government having the cash.

It wipes out savings unless you get special dispensation for exchanging more currency. Only those with sufficient political pull should be wealthy.

It removes inflationary pressure. Those with savings could bid up the price of luxury items on the black market. This is bad. Those with a lot of political don't like having their goodies increase in price.

Moreover, as all of this happens, the government can try to monitor who's exchanging more currency than they could have "properly" earned. Those with additional currency got it somehow, and I'm betting all the "somehows" are illegal.