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Definition of Hyperinflation, Causes and Examples

Definition of Hyperinflation, Causes and Examples

Hyperinflation is a term used in economics to describe a situation in which the prices of all products and services rise uncontrolled over time. Hyperinflation, in other terms, is a state of rapid inflation.

When the rate of inflation rises by more than 50% in a month, it is referred to be hyperinflation. In his work "The Monetary Dynamics of Hyperinflation," American economics professor Phillip Cagan explored economic concepts for the first time.

Definition of Hyperinflation

The price of products and services grows so quickly under hyperinflation that customers are unable to buy much with their money.

Hyperinflation is widespread across all sectors of the economy, implying that the costs of all goods and services rise by about the same proportion in all countries affected.

Even worse for the country and its economy, prices of the same goods and services in overseas markets have not risen in lockstep. When the inflation rate hits 50% for a month, most economists agree that hyperinflation has begun.

For example, annual inflation in the United States has averaged above 3% since 1913.

When the monthly inflation rate falls below 50% and stays below that level for more than a year, hyperinflation is over.

This foundation was employed as detailed in Phillip Cagan's The Monetary Dynamics of Hyperinflation, a subject on economic conditions authored in 1956.

Hyperinflation's Causes

Most hyperinflation is caused by an excess of money. The amount of cash in circulation exceeds the amount of goods and services available - a country's money supply is not sustained by GDP growth (GDP).

When governments issue additional money to pay off debt, hyperinflation is intensified, severely depreciating the currency.

Hyperinflation occurs when local residents lose faith in the currency and seek alternative methods of transaction security, such as bartering and utilizing foreign currencies.

Hyperinflation can be caused by a variety of factors, all of which are linked to the causes of inflation; however, historically, hyperinflation has been largely caused by excessive money printing (excess money supply) implemented to finance excessive government budget deficits, particularly during times of depression. 

The depression is characterized by a lengthy period of economic contraction that can persist for years and is marked by high unemployment rates, an increase in bankruptcies, lower productive output, and a reduction in credit availability.

The central bank normally increases the money supply in reaction to this circumstance since it encourages banks to lend more, as well as individuals and businesses to spend more, both for consumption and investment.

Although this process is common and widely used during periods of slow growth or recession, if the increase in the money supply exceeds the corresponding growth in the output of goods and services (often measured in Gross Domestic Product, a measure of an economy's production of goods and services), hyperinflation can result.

The major issue is that an excessive growth in money creation in comparison to total output generates a vicious cycle in which, because monetary and price inflation expand rapidly, local citizens are hesitant to hold significant amounts of local currency because it quickly loses value.

People will therefore spend it as soon as they receive it to purchase an asset with inherent value or a more stable foreign currency.

The issue is that when the velocity of money movement grows, so does the acceleration of prices, implying that the growth in the general price level exceeds the increase in the money supply.

While excessive money supply has historically been a primary source of hyperinflation, negative supply shocks, which are often connected with war, natural disasters, or political instability in these severe circumstances, are also a prevalent cause.

Hyperinflation's Consequences

While hyperinflation's effects may appear to be identical to "general" inflation, they are not.

In truth, hyperinflation's fundamental problem is the violence and devastation it creates as a result of its rapidity.

When the economy is affected by hyperinflation, people start stockpiling things because they are afraid that the same goods will be more expensive tomorrow, or that they will be unavailable.

From permanent products to perishable goods like food and consumables, mandatory hoarding generates shortages.

Even when the most basic things become scarce, the economy begins to collapse at this point.

People's savings are wiped away by hyperinflation, making the affected areas less susceptible to investment.

When the home currency becomes nearly unusable at this point, economic actors turn to other kinds of stable money.

In some situations, if the government is unable to reform the currency, it may decide to legalize a stable foreign currency, which can then be used legally for domestic transactions and to try to import the commodities that are lacking.

For example, during Zimbabwe's recent hyperinflationary crisis, local currency was bolstered by stable foreign currencies such as the US dollar and the South African rand.

Another regular occurrence in countries suffering from hyperinflation is the printing of bigger denominations by central banks as smaller notes become worthless.

One of the most famous examples is what happened in late 1923 in the Weimar Republic of Germany, when the Weimar government's Reichsbank issued notes having a face value of 100 trillion marks during the country's hyperinflation (100,000,000,000,000).

Because one US dollar is equal to 4 trillion German marks at the peak of inflation, this is a required measure.

Case in point of the German Weimar Hyperinflation 1923

Germany was forced to pay a substantial war debt to the victorious nations after losing World War I. Germany, on the other hand, was forbidden from paying compensation in the "Papiermark" currency because the value of the fiat currency had plummeted due to the enormous number of loans taken out to cover war costs.

Weimar Germany was forced to sell enormous sums of marks in exchange for the foreign money with which it was authorized to make payments in order to service its debts.

The German government began selling brands for cash at any price, resulting in hyperinflation.

Because of this age of extreme hyperinflation, Adolf Hitler rose to power. Germans were weary by postwar reparations and eager to hear Hitler's message, with prices doubling every 3.7 days and inflation of 29,500 percent.

Hyperinflation in Zimbabwe

Definition of Hyperinflation, Causes and Examples

Between 2004 and 2009, Zimbabwe faced hyperinflation. To fund the Congo conflict, the government minted money. Droughts and farm confiscation also hampered the availability of food and other locally produced commodities. 

As a result, hyperinflation was worse in the United States than it was in Germany. The daily rate of inflation was 98 percent, with prices doubling every 24 hours. It came to an end when the country's currency was retired and replaced with a system that utilized a variety of foreign currencies, mostly the US dollar.

Getting Through Hyperinflation

Hyperinflation is uncommon, yet it is evident that many people are concerned about it. The question is, what will you do if hyperinflation occurs?

So here are three strategies for dealing with hyperinflation's severity so that you are protected.

You'll be better prepared and able to resist the onslaught of hyperinflation if you practice good financial practices.

First, make sure you're well-prepared by diversifying your investments. After that, you should balance your assets, such as stocks and bonds, gold and other big assets, and so on.

Second, double-check that your passport is still valid; you may need it if hyperinflation in your country worsens to the point where you can no longer wait.

Third, you should have unique talents in addition to money and passports because hyperinflation can lead to barter-based trade. Having abilities can be really profitable. For example, if you need a cart load of money to buy bread during hyperinflation, knowing how to manufacture or at least bake bread is a smart idea.

Key Points

1. Hyperinflation is defined as a price increase of more than 50% in a single month.

2. This can happen when a government prints more money than the country's GDP can support.

3. Hyperinflation is more likely to develop during times of economic uncertainty or depression.

4. Hyperinflation can also be caused via demand-pull inflation. People hoard when prices rise, resulting in a surge in demand chasing too little supplies. Hoarding might lead to shortages, which would exacerbate the rate of inflation.

5. Germany, Venezuela, Zimbabwe, and the Confederacy during the Civil War were among the countries that experienced exorbitant inflation rates. Venezuela continues to struggle with hyperinflation.

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