Hyperinflation

March 31, 2009

Overview

Hyperinflation, according to pundits, is an inflationary vicious sequence without propensity towards attaining equilibrium. In other words, it is an out of control inflation, excessively high and rapid inflation. In layman’s language, it is the rapid escalation of increase in price that makes the idea of inflation meaningless. This is to say that the prices of goods and services in the marketplace rapidly increase, while the currency tremendously loses its value.


The media depict hyperinflation as either swelling inflation rates over a three year period approaching 100%, or inflation greater than 50% monthly. As a rule of thumb, typical inflation is reported annually, but hyperinflation is frequently reported for much shorted periods, often monthly. Hyperinflation is usually associated with economic depressions, wars and/or their aftermath and social and political upheavals.

When hyperinflation is linked to war, it often occurs when there is some confidence lost in the currency’s ability to maintain its value in the war outcomes. As a result, sellers tend to demand some risk premium in order to acknowledge the currency in question, and this they do by raising the prices of their goods or services.


On the other hand, hyperinflation, as related to depression, frequently occurs when there is an immense increase in the supply of money which is not supported by the GDP (Gross Domestic Product). As a result, there is a disproportion in the supply and demand for the money. If eventually left unimpeded, the currency substantially loses its value.

Causes of Hyperinflation

It is still debatable as to the root causes of hyperinflation, but generally, it becomes apparent when there is a radical debasement of coinage, or when the money supply’s increases and remains unchecked. Coinage debasement is when the coins are constantly ‘shaved’ of some of their silver and gold, resulting in an increased circulating medium but a decreased currency value. This is eventually accompanied by a prevalent unwillingness to hold the money, longer than the time required to trade it, for something substantial, for fear of further loss.

Basically, an imbalance occurs between money supply and demand, which is followed by complete loss of confidence in the currency. Since paper money continues to lack inherent value, enacted legal tender laws and sometimes even controlling the prices cannot force the receipt of paper money. The laws may be enacted to stop reduction of the value of paper money, in relation to commodities such as silver, hard currency gold etc. In this state, if more money is printed, the vicious hyperinflation cycle will continue.

In general, hyperinflation is associated with paper money since it can easily be used to increase money supply, literally by adding more zeros to the money plates and printing or even ‘running to the store’ and stamping old notes with recent numbers. By and large, the money printing entity cannot match their pace with the pace at which the money is devaluing, consequently counteracting their endeavor to rouse the economy.

Effects of Hyperinflation

It substantially wipes out the purchasing power of the savings made by the public and private sectors. Additionally, hyperinflation favors extreme consumption and accretion of real assets, to the detriment of the economy. Needless to mention, hyperinflation causes the monetary base, regardless of being hard currency or specie, to flee the affected economy, and as a result makes the affected economy an abhorrence of investment.


It is therefore not surprising that hyperinflation is countered with severe remedies such as changing the currency basis or imposing the surprise therapy of cutting down immensely on the government budget. Changing the currency basis may mean allowing the central banks or Federal reserves to only print money equal to what they have in a foreign currency reserve.

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Written by Uncle Sam · Filed Under Economics 

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