What is Hyperinflation?
Created on 25 Feb 2021
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Updated on 24 Dec 2022
Have you ever wondered as to why we can't print more money for our needs?
We all know that the Government prints money for the country, so it's quite natural to wonder why it cannot print as much money as it needs and fulfil the needs of the country.
Here' why this can't happen.
If the Government does print as much money as it wants, then that situation will lead to hyperinflation.
Hyperinflation is excessive, out of government control price rise in an economy. In hyperinflation, prices can increase manyfold in a fleeting period. Every Government in the world tries to take measures to control hyperinflation in its economy.
Let us get to the crux of the topic and understand the whole concept.
Hyperinflation: Effects Of An Uncontrollable Inflation
Hyperinflation is a situation where excessive, rapid and out of the control price rise occurs in an economy. Normally, if the inflation will be more than 50% in a month, then that inflation will be termed as hyperinflation.
American economist Prof. Phillip Cagan first gave the concept of hyperinflation in his book "The Monetary Dynamics of Hyperinflation." A hyperinflation is a rare event, but it has happened in the past in countries like Germany, Zimbabwe, and Venezuela.
Causes of Hyperinflation
Hyperinflation occurs due to the following reasons:
Excessive Money Supply
The primary reason is excessive money supply in the market by the Central Government, which is not supported by economic growth. During the depression, the country suffers from unemployment, bankruptcies, and less money supply in the market. To counter these things, the Government of that country increases the money supply by printing more money and injecting money into the market or to cover the budget deficit.
Since the money supply in the economy is not supported by economic growth in the economy, the situation leads to hyperinflation. As the demand and supply are the same, and people have more money in their hand, this will result in the price increase of the same goods in the country, which is inflation. As the situation gets deteriorated further and more money is pumped up by the Government, a vicious cycle of price increase happens, which leads to hyperinflation.
Loss of confidence in an economy
Hyperinflation also happens when there is a loss of confidence in an economy, and the central bank is unable to maintain the currency value in the market. This situation may occur due to the following factors:
- During a war, a company selling products domestically and internationally may demand a risk premium for accepting currency by increasing the prices.
- Loss of people's faith in the Government's currency, which leads to hoarding of goods, which further makes those goods scarce and creates a huge price increase.
- Change of laws related to legitimate printing of notes regarding gold, silver, and foreign exchange, which creates confusion in the economy and reduces the value of the paper currency.
Effects of Hyperinflation
The situation of hyperinflation leads to a devaluation of local currency in the foreign exchange market in comparison with other currencies. Due to the devaluation of the currencies, holders of the local currencies will minimize their holding and will switch to other stable currencies.
People will panic, and to avoid paying more in future, people will start hoarding. This hoarding will create a shortage of goods around the countries. The hoarding will start from durable goods, like jewellery, cars, etc. If the hyperinflation persists, people will start hoarding perishable foods, like vegetables, fruits as well.
People's savings will be worthless. Moreover, lenders will go bankrupt as their loans will lose their value, and people will stop making deposits. Hyperinflation will hit the elderly and the poor the most.
Hyperinflation will lead to high unemployment and cause turmoil in the countries. The barter system will arise. Government revenue will fall, and it will thus print more money to counter this situation.
But that situation will create a vicious cycle of price increase in the market and encourage more printing from the Government. If hyperinflation will persist for a longer period, it will ultimately lead to an economic collapse.
Instances of Hyperinflation
Germany has suffered hyperinflation during the 1920s. During World War I, the Germans increased money supply and paper marks were increased by four times, and then by a billion times till 1923. From the start of World War I till 1923, they issued 92.8 quintillion paper marks. As a result, the value of the mark decreased from four marks to a dollar to one trillion marks a dollar.
Initially, the increased stimulus increased the economic war. But when the war ended and Germany lost the battle, the allied forces imposed 132 billion marks on Germany as war reparations. Due to this reason, the money supply increased by a billion times, production in the country collapsed, and there was a shortage of goods in the whole country. Due to the excess money supply, and the supply was limited, prices of daily goods were doubling every 3.7 days. The inflation rate became 20% per day. This caused huge chaos, hunger, poverty in the country.
Zimbabwe had experienced hyperinflation in the 2000s. In the 1990s, the Government introduced land reforms, and land distribution occurred on the basis of race, from white people to black people. But with little experience, the new farmers were unable to produce food, and there was a large food shortage across the country. Due to the sharp fall in the agricultural and manufacturing output, banking lending collapsed.
The Government started printing more money to finance the war with Congo to increase the salaries of its employees, to pay the bills of the Government, and to pay off the national debt. Due to excess money in the country with limited supply, prices began to rise. The Government again printed more money, and prices increased further. This created a vicious cycle of printing money and price increase. The country inflation rate in 2008 was 98% a day, and the prices of goods doubled every 24 hours. The unemployment rate touched 80%.
The whole situation ended by changing the country's currency to the US dollar, which stabilized the economy.
The Bottom Line
Although hyperinflation is a rare event, some people are still worried about its occurrence. Well, you can protect yourself from hyperinflation by following sound financial habits. You should have a well-diversified portfolio, including equities, bonds, commodities like gold and silver, and real estate.
However, governments have been taking appropriate measures to prevent inflation in the market and maintain stability in the market. However, it is always better to know about the worst situations that can happen in the future and be readily prepared by taking appropriate measures to tackle that situation.
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