What is Hyperinflation?

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Types of Hyperinflation

If the price rise is up to 3% a year, it is creeping, a 3% to 10% rate is known as walking, and more than 10% is known as galloping. When the rate of inflation is unusual or too high (say 50%), it’s termed Hyperinflation.

When does Hyperinflation Happen?

Hyperinflation is a situation under which inflation goes completely out of control. Although it is considered a rare event, in the 20th century, the event has happened in 55 countries, including major economies like China and Germany. In such a situation, the concept of inflation starts becoming meaningless.

Hyperinflation happens when there is a significant decline in the gross domestic product (GDP). However, the money supply is randomly increasing.

It results in a huge imbalance between the supply and demand in the economy. If the same is left unchecked for a while, the currency’s price starts following the prices of the goods starts rising substantially.

It is often said that Hyperinflation is an unnatural disaster. It often happens when there is a steep devaluation in the currency‘s value, and the citizens start losing confidence.

In such a situation, since people perceive that currency has no value, they start hoarding goods and commodities with value. Since the demand for such goods starts rising, prices also rise rapidly. It also has a ripple effect. As the price rises rapidly, basic commodities like fuel and food become scarce, which kicks on the second cycle of skyrocketing prices of essential commodities.

The third stage of the problem starts when the government starts printing more money to stabilize prices and increase liquidity in the system in response to this rise. This only increases the problem.

How does one quantify whether it is normal inflation or Hyperinflation?

It has been seen that generally, normal inflation is measured monthly. So, economically it has been said. Hyperinflation is measured daily when the prices of goods start rising by 5 to 10 percent daily. Hyperinflation is a situation that occurs when the prices of goods increase by 50% over one month.

History of Hyperinflation

The below table shows the list of countries with a History of Hyperinflation.

source: goldonomics

Let us now write a few examples in detail to understand the flow and impact of Hyperinflation.

Yugoslavia Hyperinflation (the 1990s)

It is a case of prolonged and one of the most devastating Hyperinflation ever. The former Yugoslavia was witnessing inflation rates that exceeded 75 percent annually. The country was on the verge of national dissolution.

It was discovered that leaders of this Serbian nation plundered huge national treasury by issuing $1.5 billion to acquaintances. It forced the government to print excessive money to meet its financial obligations.

Hyperinflation quickly engulfed the whole economy, erasing all wealth and leading people to move into a barter system. The prices of goods doubled each day until the inflation level reached 300 million percent every month.

The Government then took some temporary measures where the production ultimately stopped, and they replaced the currency with the German mark, which finally helped them stabilize the economy. In modern-day economics, this has been one of the worst-case of Hyperinflation.

Germany Hyperinflation (the 1920s)

Sometimes, it has been seen that major money-draining situations can also lead to Hyperinflation. It is the case of Germany in the 1920s.

Reeling from the impact of World War 1, the country printed money to pay for the costs of World War 1. World War 1 increased from 13 billion Deutschmarks in 1913 to 60 billion Deutschmarks in 1920.

Sovereign debt increased from 5 billion to 100 billion marks during the same period. Initially, it lowered the cost of exports and increased the economy’s economic growth.

Another 132 billion marks also impacted the country in war reparations as the war ended. It led to a collapse in production and a huge shortage of goods.

The major impact was seen in essential goods like food. Since the cash in circulation was high and goods available were in shortage, the price of everyday items started doubling every 3.7 days.

As per estimates, the inflation rate per day was 20.9 percent.

Zimbabwe Hyperinflation (2004-2009)

The most recent example of Hyperinflation took place in the African nation of Zimbabwe. It happened between 2004 and 2009.

It also started with war, and the government printed huge amounts of money to fight the war of Congo. The supply side of goods was hit due to the impact of major droughts during the same period.

In this case, Hyperinflation was worse than in Germany as the inflation rate stood at 98 percent a day, and the prices, in general, doubled every day.

It ended post-2009 when people started accepting other currencies instead of Zimbabwean dollars.

Let’s look at a case study of Hyperinflation in Zimbabwe. What were its causes and impact on the country’s economy?

Hyperinflation is characterized by the general increase in goods and services price levels at a very high rate, say 50% a month.

Hyperinflation in Zimbabwe began in the late 1990s, shortly after confiscating private farms from landowners. It came towards the end of Zimbabwean involvement in the Second Congo War. During the height of inflation from 2008 to 2009, it was difficult to measure Zimbabwe’s Hyperinflation because the government of Zimbabwe stopped filing official inflation statistics. However, Zimbabwe’s peak month of inflation is estimated at 79.6 billion percent in mid-November 2008.

Some of the causes and effects of the same are shown below.

Causes

Land reform program

War funding     

Economic Mismanagement

Effects

Persistently very high inflation

Severe Unemployment

Drop-in life expectancy

Severe food crisis·      

Widespread diseases and a high mortality rate

What does the Central Bank do to maintain inflation?

In the modern-day world, the country’s central banks are responsible for maintaining inflation under control. The primary job of the Central bank is to control inflation under control. It is done by managing interest rates in the economy and controlling the money supply. Tightening the money supply helps reduce inflation while increasing the money supply is coupled with increasing inflation. The United States Fed has the target inflation rate of 2% for the economy. If the Inflation rate in the economy moves above 2%, the Fed will increase the Fed Funds rate (a benchmark for the interest rate in the economy). It will reduce the money supply in the system and lower inflation in the economy.

How can Investors avoid the Hyperinflation Trap?

Generally, Hyperinflation is a function of mismanagement and is a rare event. However, investors and readers are advised to be cautious about it.

Do not keep your money stagnant otherwise, inflation will eat away its value.

A penny saved is a penny earned. But thanks to inflation, over time, the value of the penny saved could be much less than when earned.

A lot of wealth is destroyed, and the poor are hurt the most in such a situation. Moreover, it results in a huge imbalance between the supply and demand in the economy.

If the same is left unchecked for a while, the currency’s price starts following the prices of the goods rapidly rising substantially.

It is often said that Hyperinflation is a man-made disaster. It often happens when there is a steep devaluation in the currency‘s value, and the citizens start losing confidence. In such a situation, since people perceive that currency has no value, they start hoarding goods and commodities with value.

If you save money by just putting it aside at home, it will lose value over time. So, always invest money to beat inflation and get some handsome returns in the future. If you can’t think of where to invest your money, ask your parents or some elderly person in the family for their guidance. Then, let it grow by gaining interest.

But whatever you do, do not just lock your money up in your safe and keep it stagnant. If you do this, you will be losing money without even knowing it.

The more money you keep stagnant, the more money you will be losing.

The rate of returns on your investment should be higher than the rate of inflation.

When investing, you have to make sure that the rate of return on your investment is higher than the inflation rate.

What is the rate of return on investment?

What is the rate of return on investment?

The rate of return is how much you make on an investment.

Suppose you invest Rs.100 in the market and over a year, you make Rs.110, then your rate of return is 10%.

= (Latest price/Old price-1)*100·      

= (110/100-1)*100 = 10%

What is the rate of Inflation?

A general increase in prices is called inflation, and the rate at which or how much the prices go up is called the rate of inflation.

If the price of chocolate is Rs. 80, then after a year with a 4% rate of inflation, the price will go up to (Rs. 80 x 1.04) = 83.2

If the inflation rate is 10%, you should look for an investment avenue that will return at a rate of more than 10%. So your money grows at a faster rate than the rate at which your money’s value or your purchasing power is going down. The situation goes completely haywire, and people tend to lose confidence in the currency. When the final call of scrapping the currency is needed, the general solution has been to adopt a new currency of some other country. It tends to increase confidence, and people stop buying commodities perceiving value. Governments need to play a vital role in maintaining confidence in the currency so that people don’t hoard essential commodities.

Conclusion

Overall, inflation is a very important concept that the country’s central bank intends to manage. However, mismanagement and a wrong turn of policy can make it a bomb in the form of Hyperinflation. It can ruin the economy, and people feel worse as part of the process. A lot of wealth is destroyed, and the poor are hurt the most in such a situation. It results in a huge imbalance between the supply and demand in the economy. If the same is left unchecked for a while, the currency’s price starts following the prices of the goods rapidly rising substantially. It is often said that Hyperinflation is a man-made disaster.

In the modern-day world, the country’s central banks are responsible for maintaining inflation under control. It often happens when there is a steep devaluation in the currency‘s value, and the citizens start losing confidence. In such a situation, since people perceive that currency has no value, they start hoarding goods and commodities with value.

Some of the government measures that can curb such disasters are creating resources, having strong policies that can control the printing of money, proactive management by the Central bank of the country, and not printing excessive funding debt. The primary job of the Central bank is to control inflation under control. If the inflation rate is 10%, you should look for an investment avenue that will return at a rate of more than 10%. So your money grows at a faster rate than the rate at which your money’s value or your purchasing power is going down. Investors should look for avenues to create returns that are higher than inflation; this is the only time we are creating wealth. Investors are advised not to keep the money idle as money tends to lose value.

This has been a guide to what Hyperinflation is and its definition. Here we discuss types of Hyperinflation along with causes, effects, and examples with detailed explanations. You may learn more about financing from the following articles –

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