What is hyperinflation?
We have all heard older generations complain about the price of products "nowadays", talking about how $1 used to buy them a movie ticket and popcorn, compared to the average cost of $10 for just a ticket today. They aren't complaining about nothing, this is a very real issue the world is currently facing and it's known as inflation.
Although, with the way the economy has been going lately, hyperinflation may feel like a more fitting term. In basic terms, hyperinflation is referring to a very high and accelerating inflation rate. Let's cover what inflation is, and how this differs from hyperinflation.
What is inflation?
Inflation refers to a decrease in purchasing power related to a specific currency. This means a progressive increase in the price of goods and services results in a certain amount of money being able to buy less over time.
As already stated above, what $1 used to buy back in the day is merely a fraction of what the product or service now costs. Usually, inflation occurs at a gradual rate, however, there have been instances where inflation rates have accelerated at much faster speeds. This rapid acceleration rate leads to the value of a country's currency being diminished at an alarming rate. This is then referred to as hyperinflation.
Hyperinflation is measured when the inflation rate increases by 50% or more in one month.
What causes hyperinflation?
You may be wondering how hyperinflation occurs, and that's a great question. From an economic standpoint, there are two main causes, although external factors can also come into play. External factors might include war, natural disasters, a pandemic, and more, however, here we will be covering the two main causes.
Number one is an increased money supply. Most think that an excess supply of money sounds great, but it can have colossal impacts on a currency if not backed by economic growth. Countries usually grow through trading, businesses, and bringing money into the country from outside the borders.
This issue comes into play when countries print money at an accelerated rate, increasing government debt with central banks which they then have to pay back with interest. This additional interest and debt gets placed on citizens, who are then expected to pay more tax and pay more for products.
The second is demand-pull inflation. This can also be described as supply vs demand. While some small businesses see this as a benefit, being able to increase prices due to their unique products, the same can not be said for common household items. This inflation occurs when the demand for products goes up, especially as capitalism rises, yet the production of said products can not contend.
This creates a gap within the supply, making it hard for businesses and economies to make money unless they raise their prices. So again, we see product prices rising thus reducing the purchasing power of a currency.
The effects of hyperinflation
One of the most common effects of hyperinflation is the devaluation of currencies, moving those who hold them to switch to more valuable assets. Whether it is investing in the stock market or another currency, this takes additional money out of the currencies' economy and proceeds to make hyperinflation worse. Luckily those who have invested in other means of value are not as affected by this additional pressure.
Previously, inflation in Zimbabwe reached such dire levels that the country ultimately wrote off its national currency and switched over to the US dollar. At one point, their currency was so hyperinflated that their $100 trillion Zimbabwe dollar banknote could only buy a few loaves of bread. This impact affected banks, foreign trading, and basic government services, creating another ripple effect leading to further inflation. It's a problem that continues to occur, ravaging countries and livelihoods around the world.
Hyperinflation and monetary policies
Central banks play a vital role in preventing hyperinflation through the implementation of monetary policies.. As they control the money supply, regulate interest rates, and oversee the stability of the currency, central banks are responsible for maintaining a balance between growth and inflation. Done so by carefully monitoring economic indicators to manage and prevent potential risks of excessive growth and inflation.
In order to keep hyperinflation at bay, governments need to practise responsible fiscal policies, avoiding excessive borrowing and uncontrolled spending. Maintaining a stable exchange rate and encouraging foreign investments can also strengthen economic stability.
How to combat hyperinflation
In an attempt to curb the devastating effects of hyperinflation, below are four measures that governments and central banks could implement.
Tightening money supply
An obvious one, central banks can reduce hyperinflation risks by curbing the rapid increase in the money supply. This involves limiting the printing of new money and implementing stringent monetary policies.
Interest rate adjustments
By raising interest rates, central banks can discourage excessive borrowing and spending, which acts as a means of stabilising the currency's value and mitigating hyperinflationary pressures.
Implementing currency controls can be a smart move to stop money from leaving the country and prevent risky speculation, all while keeping the currency strong during uncertain economic times.
In extreme cases, currency reforms, such as introducing a new, more stable currency or adopting a foreign currency as legal tender, can be considered to tackle hyperinflation and restore economic confidence, as was the case with Zimbabwe mentioned above.
Examples of hyperinflation in history
These instances from the past where hyperinflation wreaked havoc serve as a clear indication of the devastating economic impact it can have on countries.
Germany (Weimar Republic):
During the early 1920s, Germany experienced one of the most infamous hyperinflation episodes. Printing money to cover war reparations led to the German Mark's catastrophic devaluation, resulting in absurd price increases and widespread economic collapse.
Mentioned above, in the late 2000s, Zimbabwe endured a severe hyperinflationary crisis, reaching unimaginable levels. Rampant money printing and political instability eroded the Zimbabwean dollar's value, rendering it practically worthless and forcing the country to abandon its currency.
Starting in the 2010s, Venezuela suffered a hyperinflationary spiral driven by a combination of political mismanagement, plummeting oil prices, and economic turmoil. This ongoing crisis has caused immense hardships for the Venezuelan population.
In the 1990s, Yugoslavia grappled with hyperinflation as a result of political fragmentation and war. Spiralling prices led to the eventual replacement of the Yugoslav dinar with new currencies in several successor states.
Post-World War II, Hungary faced hyperinflation of unprecedented proportions. Skyrocketing prices and economic instability plagued the country until it eventually switched to a new currency.
These history lessons serve as cautionary tales, showing us just how terrible hyperinflation can be and why it's crucial to have solid monetary policies in place to protect against these economic disasters.
Hyperinflation, rapidly increasing inflation rates, is a serious economic problem with disastrous effects, as seen in historical examples like Germany, Zimbabwe, Venezuela, Yugoslavia, and Hungary. While central banks play a crucial role in preventing hyperinflation through monetary policies, governments must too play their part and practice responsible fiscal policies.
While inflation rates might feel dire, hyperinflation is highly unlikely to ever take effect in the United Kingdom as The Bank of England and government have many tools at their disposal to identify and prevent the onset.
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