At WiseGEEK, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.
What is Hyperinflation?
In economics, hyperinflation is a term referring to inflationary action that is considered to be out of control, or increasing at a rate much greater than it normally would. The term is somewhat subjective in that there is no firm rule for determining when a situation goes from being inflation to hyperinflation. Thus, declaring hyperinflation is often the job of financial analysts and political pundits.
While there are still some questions about when a situation becomes hyperinflationary, a number of suggestions have been made. No matter what definition is used, most economists agree hyperinflation exists when there is at least a 100 percent rate of inflation in the timespan of just a few years. No matter what it is called, inflation anywhere close to this level often results in a substantial hardship for the population.
Hyperinflation takes place because a country's currency loses its value rapidly, causing prices to rise in response. Most countries have experienced a period of hyperinflation at some point during their histories. It often results when a government prints a great deal more money than it normally does to make up for a shortfall in some other area. The government's answer to a lower currency value is to print even more money, which feeds a continuous cycle of currency devaluation.
Hyperinflation can cause great difficulty, especially in the short term, because wages may not keep up with the declining purchasing power of the currency. It can also cause a crisis in other industries, such as banking, where repayment rates are often guaranteed to a borrower. Therefore, when hyperinflation takes place, the money the bank gets back may be worth far less than the money it originally lent out.
There are a number of factors that can be implemented to stop hyperinflation from continuing. The government could set a new base unit. For example, it could decrease its current unit by a factor of 100, making notes that used to be $100 in old currency worth $1 in new currency. However, without doing something to address the root problem, hyperinflation will continue to push the base units lower in value.
Long-term solutions must include the implementation of a new monetary policy for the country. Interest rates could be increased, which would make money harder to borrow and therefore increase its value. Also, the government could set new spending policies, which would help curtail the need to print money to cover obligations.
AS FEATURED ON:
AS FEATURED ON:
-
![The Weimar Republic's monetary policies caused hyperinflation during the interwar years.]()
By: awesomephantThe Weimar Republic's monetary policies caused hyperinflation during the interwar years. -
![The Federal Reserve constantly monitors for inflationary risks to the U.S. economy, and may respond with actions or policies to try to stave off price increases.]()
By: qingwaThe Federal Reserve constantly monitors for inflationary risks to the U.S. economy, and may respond with actions or policies to try to stave off price increases.
Discussion Comments
I think this is a bit wrong. Hyperinflation does not occur when a currency loses its value causing prices to rise. It occurs when prices rise causing the currency to lose its value.
Here is how it happens.
1) People hoard cash causing the govt to print currency not the other way around where the government prints cash causing people to have a bunch of it.
2) People start to worry about the cash under the mattress and scramble to buy goods whether currently needed or not. Prices raise and sometimes kill the currency.
@yumdelish - I am not sure that those sorts of preparation are really that uncalled for if a country is facing hyperinflation. While some of it is a bit extreme, I can see the benefit of having some of your investments in silver and gold, as well as stockpiling goods for your family. Having a well-stocked pantry is always a good idea, as you never know when disaster can strike, financial or otherwise.
As for having a generator, bartering items, water purifiers, a bike and firearms on hand, I really think this should be standard in most homes. Once again, there may not be a countrywide financial meltdown, but if a natural disaster hits, and people start looting, it's better to be safe than sorry.
Hyperinflation is bad for everyone, as food prices skyrocket and those already struggling to make ends meet, usually end up jobless. For the most part, the devaluation of currency sends a massive ripple effect through the commodity market and sends people into a tight conservation mode.
If people are conserving, they are not spending, which leads to more job losses. Often in difficult times the government will encourage people to spend, spend, spend.
If you look at any recent financial crash, you will see this pattern emerge, with the government trying to get people out to shop, as it helps the economy and keeps workers doing their jobs.
I follow news on the economy about as much as most people I think. It's not a subject I know a lot about but I do care about my finances and my future. This is probably a fairly healthy attitude, and I appreciate the tips and comments here on dealing with or preparing for instability.
Some people really become obsessed with the potential catastrophe they see ahead though. I was just reading a blog written by a guy who believes America will soon be in real trouble.
He has many tips for surviving hyperinflation, which is assumed to be a very real possibility. These include:
*not having all your savings invested in US dollars, look to gold and silver for at least half of this amount.
*keep at least 3 months worth of cash in the house (not sure why he says this, as surely it would be worthless)
*have a good percentage of your assets registered outside the USA
*stockpile basic food and hygiene items at home, because shops will be looted
*build a collection of goods which would be attractive as bartering items, because it will come to that when the currency loses all value
Well the list is fairly long, and also includes buying firearms, a bike for transport, water purifiers, a generator and so on.
It all seems a bit alarmist to me, but maybe I'm being an ostrich?
Reading about deflation and hyperinflation reminded me I once met a guy who had travelled extensively for a couple of years, mostly in South East Asia. He had enough stories to guarantee him a place at a dinner table every night for months afterwards, and I was more than happy to hear them.
The tale that stands out in my mind was when he mistakenly exchanged a fairly large amount of US dollars on crossing one border. Due to hyperinflation of the economy he was handed enough local currency to fill his entire suitcase!
What followed was some kind of madcap trip around the country, desperately trying to offload the cash. He stayed in the best hotels, bought endless drinks and dinners for people, and as many souvenirs as could fit in the case, (which was still overflowing with notes of course.)
Even after weeks of this behavior more than half remained, which he couldn't even give away! I wish they could make a movie of his travels, it would be hilarious.
@David09 - I think we can learn a lot by looking at German hyperinflation after World War I.
Germany abandoned the gold standard for its currency and funded the war by borrowing. Thereafter its currency dropped in value. As time wore on, they had to borrow more and more to repay the war debts, until the German currency (the mark) became almost worthless.
I get two lessons from this. First, we made a mistake by abandoning the gold standard. Second, we need to stop borrowing and cut spending, or the dollar will meet the same fate as the German mark.
I am buying gold as part of my plan in preparing for hyperinflation, should it ever come. The reason is simple: gold increases in value as the economy undergoes inflationary shocks; it’s a hard asset, and you can take it to the bank regardless of what happens to the dollar or any other currency.
My only regret is that I didn’t buy gold many years ago when it was far cheaper than it is now. Now I can’t buy as much of it as I want, but I’m definitely loading up. I’m not abandoning stocks or even cash, just using gold as a hedge against hyper inflation.
@miriam98 - I don’t believe it’s the debt alone that is the cause of hyperinflation. I believe the real cause is a drastic increase in the money supply. When governments print more and more money, the dollar loses its value, and it takes more of those dollars to buy the same stuff you used to buy before the hyperinflation took place.
Personally, I believe it is government stimulus programs that are the biggest culprits in this regard. The government infuses the economy with more money, supposedly to get it moving again.
If it doesn’t however (and historically most stimulus programs don’t work), then you have a lot of money floating around, with very little economy activity to prop it up. Hyperinflation is the result.
My opinion is this: the less government does to try to “fix” an economy, the better.
Should hyperinflation in America ever take place, I think it will be because of extreme deficit spending. If we ever get to the place where we can no longer service the interest on the debt, much less the principal, hyperinflation will be the inevitable result.
Unfortunately the national debt has been rising for a long time and this could seriously affect our credit rating and our ability to borrow more money. China holds most of our debt and if they quit lending, then the government will have to print more money.
When will our politicians ever learn? After all, most of us are willing to buckle down and cut spending when we have to. I think our elected leaders need to do the same.
Post your comments