Glossary

Hyperinflation

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Hyperinflation is defined as unrestricted growth in prices for goods and services in an economy. It happens when resources become limited, such as gas or food.

What Is Hyperinflation?

Hyperinflation in an economy is defined as an unlimited increase in prices for goods and services. In contrast to inflation, hyperinflation is a rare occurrence in an economy. It has, however, occurred in the past in different countries such as China, Germany, and Zimbabwe, to mention a few.

What Causes Hyperinflation and How Can It Be Prevented?

Hyperinflation is a sort of fast inflation in which prices can jump by 50% or more in a month. It is also known as "permanent inflation."

It may be seen in cases where a government prints additional money to pay off different obligations and costs, despite the fact that it is regarded unusual. 

To determine what causes hyperinflation, we must look at the two most common drivers of inflation: a rise in the money supply and a demand-pull imbalance.

In many circumstances, they collaborate to produce the ideal economic storm.

Money Supply

The government will print extra money to meet increased expenditures in order to pay for its high quantity of spending. This may occur in times of distress as a means of assisting citizens.

The issue with this strategy is that printing additional money has its own set of effects. Prices rise as the money supply expands, and inflation is born!

The more money that is pushed into an economy, the closer it gets to hyperinflation. This is risky since it might lead to currency depreciation.

Demand-Pull

A demand-pull imbalance within an economy is another source of inflation.

Demand pull happens when rising consumer demand for certain products and services surpasses the existing supply of those goods and services. When the increase in demand is paired with the scarcity of these products and services, market prices rise.

In developing economies, demand-pull inflation is prevalent.

Impact of Hyperinflation

The depreciation of the US dollar is one of the most noticeable symptoms of hyperinflation. The US dollar has lost approximately 96% of its value since 1935. In addition, the US currency has depreciated by 12% in 2020 when compared to a group of other nations.

This drop in the dollar's purchasing power has an impact on people all across the world, not just Americans. It has an impact on everyone. China did not depreciate its currency to match the US dollar for the first time in a long time, signaling that it may be reducing its reliance on the US market.

People in the United States may hoard money to avoid having to pay more if resources become scarce and prices rise as a result of hyperinflation. If not addressed, this trend has the potential to destabilize the economy.

Impact on Retirement Plans

While it may appear that discovering ways to save money is beneficial, the fact is that hyperinflation renders cash savings useless. As a result, you may need to rethink your retirement plans in order to understand how inflation may affect your retirement.

You'll need to account for inflation when calculating how much money you'll need to save before retiring. You need to construct a more thorough strategy for your financial future once you know how much money inflation is taking from you. The solution to all of these problems, however, is not to print more money. The more money the government injects into the economy, the more fuel for hyperinflation will be available.

Popular Examples of Hyperinflation in the Past

Weimar Germany

Following World War I, the Weimar Republic in Germany faced hyperinflation in the 1920s.

The bank released about 92 quintillion Deutsche Marks (the German currency) to combat rising inflation rates. This strategy worked until Germany was burdened with reparations from the Allies at the conclusion of the war. Production halted as a result of the extra 132 billion in debt, resulting in food shortages and higher prices to compensate. Every day, the rate of inflation climbed to about 21%.

Venezuela

Between 2013 and 2018, this was the most recent instance of hyperinflation. The Venezuelan bolivar became a weak form of money as a result of efforts to promote a new cryptocurrency. The country was also over $100 billion in debt.

As a result, employment rates plummeted and nearly matched those of the Great Depression in the United States. The rate of inflation in 2018 was 65,000%. In 2021, the country is still experiencing hyperinflation.