by Stephan Smith on December 4, 2010

Meet the dangerous, wild child sibling of inflation, hyperinflation. Capable of completely decimating a currency and an economy, hyperinflation is something that is dreaded by consumers and producers alike. On this page I will be talking about hyperinflation; I will explain what is it (other than it being the dangerous wild child sibling of inflation), how it affects an economy and what are some measures to get out of it and prevent it. I will also give some theories as to why a central bank would allow hyperinflation comes about. And yes, they do allow it. All of this very interesting stuff and I hope you find it interesting too. Time to learn about hyperinflation. Ready?

What is Hyperinflation

Hyperinflation is the most severe form of inflation; it is a significantly huge increase in the money supply of an economy which in turn leads to a rapid, out of control, erratic increase in overall prices for goods and services in an economy. The value of the currency or any other type of money that is experiencing the effects of hyperinflation, drastically and very quickly loses value. And as money quickly loses value, naturally, the cost to purchase goods and services increases at a very rapid pace. The cause of hyperinflation has everything to do with the money supply of an economy and the demand for money.

Newly Printed Euros

If too much of a currency gets created and injected into an economy, hyperinflation will manifest.

Hyperinflation is a result of an over supply of money; a supply of money that far exceeds the demand for it. Whenever an item is in great supply and there isn’t equal or more demand for the item, that item will become less valuable over time. In this case, the item is money. When a central banks preforms monetary policy actions that inject way too much money in an economy’s money supply, it leaves the door open for high inflation. And if a central bank doesn’t act quickly to fix the issue, hyperinflation will soon follow.

But why exactly is hyperinflation bad? If that question ever popped into your head, then allow me to answer that in detail. Hyperinflation is bad for everyone in an economy because it make everyone who uses the currency that is suffering from the effects of hyperinflation significantly poorer, it disrupts commerce and thus leads to a declining output of goods and services and leads to a higher unemployment rate. Sounds bad, huh? Well, it’s true.

Inflation Steals Wealth Away from Everyone; Hyperinflation Steals Wealth Away From Everyone, Quicker

Here’s an example, let’s say you have one million United States dollars in a price stable economy. With all other factors being equal, it would be safe to assume that you can purchase many goods and services with one million US dollars. Now lets say that the central bank in charge (the Federal Reserve) decides to pump an extra twelve trillion dollars into the economy’s money supply (that’s a ridiculous amount of money by the way). What do you suppose that’ll do?

Business Man with Empty Pockets

Keepers of a currency that is experiencing inflation or hyperinflation become less wealthy.

It will devalue the money that’s already in circulation, including your theoretical one million dollars. As a result, over time you would not be able to purchase the same amount of goods and services as you could prior to the insertion of the twelve trillion dollars, for those goods and services will become more expensive. If the twelve trillion dollars propelled the supply of money significantly above the demand for money, then hyperinflation will occur. In a hyperinflationary situation your theoretical one million dollars would continue to lose value until the central bank performs contractionary monetary policy actions to slow the rate of inflation (known as disinflation) or until the currency becomes absolutely worthless. Do you see how hyperinflation can make everyone less wealthy? I hope so.

Hyperinflation Gets in the Way of Buying and Selling

While reading this section, I want you to keep the previous example of you theoretically having one million dollars in mind. If a central bank injects way too much money into an economy’s money supply, the value of money goes down. Thus, the prices for goods and services will increase. In a hyperinflationary situation, the prices for goods and services will increase at blazing speeds. So back to your imaginary one million dollars. If a economy was experiencing price stability (that’s where prices of goods and services don’t increase or decrease over time), you would be able to buy a lot more goods and services in that economy than an economy that is experiencing hyperinflation. Producers would be able to sell more goods and services in a price stable economy than an economy that is experiencing hyperinflation. Why? Because as value of money decreases, the amount of money require to buy goods and services goes up and so makes more goods and services less attainable. If consumers are buying less and producers are selling less, the amount of goods and services produced in an economy will decline. Very bad news.

Hyperinflation Leads to High Unemployment

This leads me to my next point. If producers aren’t selling goods and services, not only will producers reduce the amount of goods and services they produce, they will as reduce the number of employees they have. It makes sense too. If producers are making less sales and revenue, they will have to produce less goods and services. They would also have to consider cutting expenses and firing employees.

How Did We Get Hyperinflation in the First Place

Do you know who is responsible when a country suffers from hyperinflation? It’s the central bank of the country. Central banks are in control of a the money supply of a country and whenever a country gets beat down with the ugly stick called hyperinflation, it is the result of the folly that goes on in a central bank. By implementing excessive expansionary monetary policies and flooding a country with additional created currency, inflation becomes the result. If those excessive expansionary monetary policies are implemented at a exceptionally elevated degree, hyperinflation will take hold. It’s the massive injection of unjustifiable newly created money that leads to hyperinflation.

Man Counting Chinese Yuan

Central banks are responsible for hyperinflation.

I have a two part theory as to why a central bank would allow hyperinflation to take hold of their economy. Theory one is that a central bank would purposely abandon their top responsibility, which is to ensure price stability, to try to accomplish another objective, whether it be to help boost their economies or something else. Theory two is a little more out there. It is possible that a central bank with all of its secrecy, would somehow benefit itself or another entity by allowing hyperinflation to take hold. Besides these two theories there really isn’t any reason for hyperinflation take place in any economy. I don’t understand it. If inflation becomes too elevated, implement contractionary monetary policies. Its that simple. Hyperinflation occurs when inflation is elevated and central banks don’t implement contractionary monetary policies, which is very suspicious.

How to Put an End to Hyperinflation and Prevent it from Occurring Again

To put an end to hyperinflation and preventing it from occurring again, a central bank has implement contractionary monetary policies whenever inflation becomes elevated. Contractionary monetary policies will lead to a reduction of money in an economy’s money supply and make credit more difficult to obtain. Failure to enact such policies will lead to hyperinflation. Period.

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