‘Hyperinflation’ is set to be 2023’s word of the year. After the world came to a halt due to the coronavirus pandemic and Russia invaded Ukraine just as the economy was poised to get back on track, we’ve seen alarming levels of inflation. Particularly in economies thought to be safe from it.
In this post, we’re going to discuss hyperinflation from a practical and historical context: what it is, what the different types are, and how economies work to get out of it.
‘Hyperinflation’ is the term used for when inflation gets out of hand. Inflation describes the rise in prices due to a decline in purchasing power. Inflation can be caused by things like consumers reducing their purchasing habits, high price of materials for production, or even an expectation of higher prices in the future.
Hyperinflation is what happens when these somewhat normal economic fluctuations get out of hand. Economists and media outlets will start using the term when inflation is rising at more than 50% a month, or simply when things are rising faster than expected without an end in sight.
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What are the causes of hyperinflation?
Understanding the causes of hyperinflation means first understanding inflation causes, and then illustrating how these can get out of hand.
As mentioned, inflation has a few different causes. These causes are important to better understanding what inflation is and learning how to predict it, so you can ultimately protect yourself against it.
Increasing money supply
Countries may increase their money supply when they consider economic conditions like current price stability and unemployment rate. These influencing factors can be destabilized by an increase in money supply, because this helps to lower interest rates. This in turn generates more investment and more money ultimately ends up in the hands of the consumers, who spend more and strengthen the country’s economy.
This means that inflation is a side effect of an attempt at economic reparations. When the money supply grows faster than the economic output inflation occurs. Inflation caused by increased money supply basically means there is more money circulating goods produced. When this happens at an abnormal rate, hyperinflation may occur, however hyperinflation is more likely a consequence of several factors occurring at once.
Demand-pull inflation occurs when, put simply, the demand for goods exceeds the supply that manufacturers can sustainably produce. If, for example, a certain building material is outlawed and must be replaced on a wide scale, the manufacturers of the new building material may not be able to meet the sudden demand. Manufacturers then have to increase labor, materials, machines, and import strategies to meet the demand. All of which costs more, causing them to drive prices higher.
Demand-pull inflation can also occur when there is a sudden increase in consumer demand for a new product, such as mask production during the early stages of the pandemic. Conversely, a lowering consumer demand for a product will cause prices to drop, wages to lower, workforces to shrink, manufacturers lose clients, etc. This occurs when new technology such as a new phone model lowers the value of the previous model.
The psychology of consumers can have a significant effect on inflation. Often, due to an impending, ongoing, or just-passed event that threatens a national or global economy, consumers will predict inflation is about to occur. Think of the mass toilet paper-buying that occurred as individuals awaited the arrival of the coronavirus pandemic in their regions. Consumers then buy up excess amounts of whatever products they predict will be affected, thus creating a demand-pull-style inflation.
There are two types of inflation expectations: anchored and unanchored.
Anchored inflation is when consumers and merchants expect that the coming inflation will return to central banks’ inflation targets at some point in the future. Economists describe these inflation expectations as ‘anchored’ to that inflation target.
Unanchored inflation is more likely to cause hyperinflation. This is because the expectations of consumers and merchants move away from the target, expecting inflation to rise higher still, and matching their buying behavior to those ever-rising expectations.
In contrast to demand-pull inflation whereby the demand for goods exceeding the supply ‘pulls’ the inflation higher, cost-push inflation occurs when there is a decline in the total amount of goods that can be produced. Inflation is ‘pushed’ higher when prices are raised in an effort to cope with the limited supply.
Recently in Australia, devastating floods caused by climate change ravaged farms producing produce goods such as lettuce, cauliflower, and herbs. This severed the usually plentiful supply and caused farmers to hyperinflate the prices of production of such a small supply, so supermarkets and restaurants would buy less and charge consumers more, thus stamping out the demand.
What are the effects of hyperinflation?
The effects of hyperinflation can be devastating for both individuals and economies on both local and global scales. While the impacts on both sides are linked, we’ll discuss them separately to provide a close look at how hyperinflation takes a unique toll on both the consumer and the supplier.
Hyperinflation changes consumer behavior. This can happen prior to the economic impacts of hyperinflation and merely through anticipation of it, or during, as consumers can no longer afford things they once could.
Here are some of the major consumer impacts caused by hyperinflation:
- Hoarding: as prices rise with no price cap in sight, consumers tend to hoard non-perishable goods (soaps, toilet paper, hygiene products, etc). If the inflation worsens and prices continue to rise, consumers will begin hoarding perishable goods (produce, meats, etc.)
- Loss of savings: hyperinflation causes money to lose its value, so consumers’ savings dwindle as they spend more on necessities. This makes retirees and the elderly most vulnerable to hyperinflation’s impacts on consumers, because they cannot continue working.
- Breakdown of communities: while humans are known to band together in difficult times, the stress of not being able to afford basic necessities and fearing for the wellbeing of one’s family can lead to distrust, animosity, and perhaps violence.
Business suffers under hyperinflation because it becomes more expensive to start and maintain a business, due to the rise in production costs.
Here are some of the major business impacts caused by hyperinflation:
- Erosion of the SME economy: small business competition and the progression of society through new ideas—the bedrock of healthy capitalism—grinds to a halt under hyperinflation. Entrepreneurs do not have the funds to start and maintain new businesses, thereby no refinement of existing products and services can occur through new competitors entering the market.
- Dependence on monopolies: when small business owners are unable to achieve success on their own, they become dependent on existing corporations. Store owners then must rely on Amazon, content creators on platforms like Youtube, and they are at the whims of these corporations’ policy changes and restrictions.
- Reduced expansion: even successful small-to-mid level businesses have to tighten their profit margins. Hyperinflation causes business owners to rethink their plans and often downsize, leading to redundancies and mass unemployment rates.
Does anyone benefit from hyperinflation?
Although hyperinflation is viewed as a net negative for societies, certain individuals and corporations benefit. These benefits are usually in the short term, however if deflation occurs they may retain the benefits.
Individuals who have taken out loans may see their debts wiped out during times of hyperinflation. This is because the collapsing value of currencies makes their debts worthless by comparison. Banks and lending corporations won’t spend the costs of labor to chase down debts when they have bigger things to worry about.
Global megastores like Amazon can afford to keep their prices low even during periods of global hyperinflation, because their business model has already been so successful. With smaller businesses drying up as the cost of goods makes production unsustainable, more consumers depend on online marketplaces like these, driving up their value.
What was the worst hyperinflation in history?
1923 Germany marks one of history’s worst cases of hyperinflation. It’s most notable for its dramatic devaluing of the currency and failed attempts to remedy it.
At the time, the Weimar Republic in Germany was recovering from the disastrous economic effects of the first world war. Throughout the war, the banks were producing four times more paper bills than unusual, and by 1923 this amount increased to staggering amounts. The largest note produced had a value of 120 trillion Reichsmarks.
Because the Weimar Republic was not a strong enough economy to solve the problem in other ways, their only solution was to print more money, leading to record levels of hyperinflation. By October 1923, there were a total of 400.3 billion trillion reichsmarks in circulation around Germany.
During this time, scenes of daily life belied a civilisation in ruins. Children played with worthless paper money as toys, shoppers took wheelbarrows full of Reichsmarks to buy a loaf of bread, thieves stole suitcases full of money only to dump out the paper notes inside and take the suitcase. Prices were rising so highly that, reportedly, a man who ordered a cup of coffee discovered it had increased in price by the time it arrived at his table.
Other examples of hyperinflations
In Venezuela, prices rose by 65,000% by 2018 after former president Hugo Chávez implemented price controls on food and medicine. The low prices he instated drove domestic companies out of business, oil prices plummeted, and the government began to print more cash to cope.
Hyperinflation also occurred in Zimbabwe from 2004 to 2009 when the government started printing more money to pay for the war in the Congo. Droughts and the loss of farms due to the war also choked the food supply and restricted other locally produced goods.
As a result the inflation rate rose to 98% per day with prices doubling every 24 hours. The government solved the problem by retiring their currency and introducing a system with multiple foreign currencies in circulation.
How to prepare for a hyperinflation
It may not seem like it, but hyperinflation is something you should prepare for, similar to preparing for retirement or a natural disaster. You want to protect yourself against both the inevitable and the unlikely.
Fortunately with hyperinflation, there are a few things you can do.
An inflation hedge is an investment that remains valuable despite the declining value in a currency. Common inflation hedges include investments in solid metals like gold or silver, buying property, or purchasing your own power source such as a generator or solar panels to hedge against rising energy prices.
Investors in recent years have also looked to cryptocurrency as an inflation hedge, because it isn’t manipulated by interest rates and inflation the way traditional currency is. Bitcoin, a particular type of currency, will never exceed 21 million units, making it the safest cryptocurrency for the purposes of inflation hedging.
When currency loses its value, it becomes useless. This is why one of the best things you can do when you detect the threat of hyperinflation is spend your money on necessities. Begin with investments and, if the situation worsens, purchase non-perishables and canned foods, dry foods, and frozen goods.
How to solve a hyperinflation
Solving hyperinflation usually requires the government to implement radical stabilization tactics. These differ depending on the individual situation, so to look at solving hyperinflation we’re going to examine historical cases and how they were solved.
Following WWII, Hungary’s inflation peaked at 41.9 quadrillion percent per month. This was even higher than the Weimar Republic following the end of the first world war. The war had erased up to 40% of Hungary’s wealth and 80% of its capital had been destroyed, with the government forced to pay millions in compensation for being an axis power.
In August of 1946, the government’s stabilization program included:
- Drastic tax reform
- Recovery of gold assets from abroad
- Introduction of a new currency backed by gold reserves and foreign currencies
Economic and political crises in the 1980s caused civil war to break out, ending with the division of the country back to its republics. Due to conflict and the sudden loss of a domestic market, the government printed money in response. This led prices to rise at 313 million percent per month, with farmers halting production and citizens buying goods overseas.
To correct the situation, the Serbian leader adopted a new currency backed by gold and hard currency reserves.
Suffering from economic devastation due to WWII, occupying forces took raw materials, livestock, and food which meant the government had to pay for the losses. As a result, the country experienced a famine and inflation reached its peak of 13,800% by November 1944.
Following liberation, the government took a long time to stabilize the economy, with fiscal reform, loans, and a new currency.
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