Hyperinflation Explained

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Hyperinflation Explained

Post by Stephen »

I will try to explain everything about Hyperinflation so that you will know and prepare yourself before it happens.

Types of Inflations
Inflation is defined as a general rise in prices of goods and services in an economy over a period of time.

There are many different types of inflation.

Walking Inflation is a single digits inflation rate, usually not more than 5% a year. For example, if the inflation rate is 2%, then a cup of coffee that costs $1 this year will cost $1.02 next year.

Running Inflation is double-digits inflation of around 10%-20% range. This is of much greater concern for a country's citizens. The currency is devaluing much faster than it should be. Prices going up drastically can have a devastating effect on the lower and working-class populations, who were already struggling financially. When incomes don't rise in tandem with prices, and fewer goods are purchased, they will throw the economy into chaos.

Hyperinflation, on the other hand, with the rate of more than 50% a month, is out of control inflation. The prices of goods and services rise so drastically that consumers cannot buy much with their money.

Imagine going to the supermarket and find that there is no price tag on all items (Most of the time there is nothing left on the shelf). Instead, you take the items to the cashier to calculate the price on the spot. What you pay could be twice as much or more than a few hours earlier. That is hyperinflation.

Causes of Hyperinflation
Although conventional knowledge is that Hyperinflation happens when there is a significant increase in the currency supply that isn't upheld by economic growth. That this is not the case and has never been the case. Rather, the hyperinflation is quite often brought about by some form of political, ecological, or other financial condition or breakdown, which in turn is reflected in the monetary system.

The simplest cause of hyperinflation is a supply-chain collapse. If the productive sector within economy suddenly becomes unable to meet the demand for goods on a wide scale (for instance, if factories were decimated after a war, or farm output collapsed because to famine), then prices must rise. If the demand is unable to subside (such as for essential goods like food) and supply cannot be restored or replaced (by substitution or imports) then prices will continue to rise and won't stop. This is without regard to the size of the money supply.

In fact, the cash supply tends to endogenously grow as prices rise. People need more cash to make larger transactions, so they withdraw cash, borrow cash and liquidate assets with the bank. To supply the demand for more cash, the government will print more banknotes. The "printing cash" is actually a consequence, not a cause, of hyperinflation. If the government were to try to clamp down on the cash supply, chances are that 1) they wouldn't be able to, and/or 2) people would start using other things as cash.

Effects of Hyperinflation
In Zimbabwe, racial politics trumped economics, leading the Mugabe government to evict more than 4,000 experienced white farmers with inexperienced black farmers. However, the majority of these "farmers" have no farming experience or training in farming. The outcome was that farm output production collapsed by 80%. In this scenario, prices must increase.

In Venezuela, the government-enforced price controls below the cost of production, forcing most of the private industries out of business. Because to their large foreign debt in dollars, they limited imports (which would lead to loss of dollar reserves for the government, and therefore inability to service its dollar-denominated debt), resulting in severe shortages that could not be resolved. In this situation, prices must rise.

In Weimar Germany, the situation was triggered by the enormous imposition of Germany of reparations in gold and foreign currencies for WW1. When it became apparent that Germany did not have this foreign currency, and that there would be no debt relief from Germany's creditors, Germany was compelled to sell its own currency in the foreign exchange markets, in amounts of around 30% of GDP, which drove the exchange rate down. This increased the price of imports and coupled with foreign occupation of industrial lands and mass worker strikes reducing domestic capacity too, led to elevated inflation in Germany. Workers started demanding that their salaries be linked to inflation, thus leading to a self-feeding spiral: as the exchange rate fell, salaries rose, leading to higher prices, leading to a lower exchange rate and higher wages, leading to higher prices... This is called a "wage-price spiral."

The reason behind hyperinflation is different as each situation is unique. The elements that tend to be present can include fixed exchange rates, foreign-denominated debt, supply crisis, indexation of prices or salaries, loss of capability to enforce taxes, political or other social breakdowns, or losing a war.

Statistical evidence that currency supply growth doesn't cause inflation:
https://www.ineteconomics.org/perspecti ... -inflation
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