Hyperinflation is a phrase used to describe an economy’s rapid, excessive, and out-of-control price increases. While inflation is a measure of the rate at which prices for goods and services rise, hyperinflation is when prices rise at a rate of more than 50% each month.
What is the definition of hyperinflation?
According to one definition, hyperinflation is defined as a pace of price increases of 50 percent per month or 1000 percent per year. The Handbook of Monetary Economics was published in 2010.
What does hyperinflation look like?
According to the Cato Institute, the most recent example of hyperinflation was Zimbabwe’s currency troubles, which peaked in November 2008, with a monthly inflation rate of almost 79 billion percent. Despite the fact that the Zimbabwean government stopped releasing official inflation numbers during the country’s worst months of hyperinflation, the research employs normal economic theory (purchase power parity comparisons) to calculate Zimbabwe’s worst inflation rates.
With prices nearly tripling every 24 hours, the Reserve Bank issued a $200 million note mere days after issuing a $100 million bill and limited bank withdrawals at $500,000, which was around $0.25 US at the time. Prices surged when the $100 million bill was introduced, with reports claiming that the price of a loaf of bread went from $2 million to $35 million overnight. The government even proclaimed inflation “illegal” at one point, arresting company CEOs for boosting prices on their products.
The situation deteriorated to the point where shops in the country simply refused to accept the money, and the US dollar, as well as the South African rand, became the de facto currency. Inflation was finally brought to a stop by the Reserve Bank of Zimbabwe, which re-priced the currency and pegged it to the US dollar. In addition, the government imposed restrictions that forced the country’s stock exchange to close.
What is hyperinflation, and why is it so dangerous?
- Hyperinflation is defined as a price increase of more than 50% in a single month.
- This can happen when a government prints more money than the country’s GDP can support.
- Hyperinflation is more likely to develop during times of economic uncertainty or depression.
- Hyperinflation can also be caused via demand-pull inflation. People hoard when prices rise, resulting in a surge in demand chasing too little supplies. Hoarding might lead to shortages, which would exacerbate the rate of inflation.
- Germany, Venezuela, Zimbabwe, and the Confederacy during the Civil War were among the countries that experienced exorbitant inflation rates. Venezuela continues to struggle with hyperinflation.
Is it beneficial to be in debt during a period of hyperinflation?
Consider your weekly shopping budget to get a sense of how hyperinflation might affect people and the economy. Let’s say you regularly spend $220 per week on food for your household of four.
However, one month you walk to the shop and discover that the same amount of food costs $330. It’s up to $495 by the following month. What impact would increasing costs have on your life?
What Happens to Consumers During Hyperinflation?
If you have money in the bank, you’ll most likely utilize it to stock up on groceries. This would be a totally reasonable answer from you. With your money’ purchase power dwindling, it makes sense to spend them as soon as feasible.
However, with so many people buying additional food, store shelves would quickly be depleted. As desperate buyers paid more and more for whatever food they could get, these shortages would lead to even greater price increases.
If you’re already on a shoestring budget, things will get significantly worse. You’d have to make sacrifices in other areas to buy food if you didn’t have any money. You’d eliminate all luxury spending and even cut back on essentials like heating fuel.
What Happens to Savings During Hyperinflation?
You’d lose a lot of purchasing power if you didn’t spend all of your money straight soon. Soon, all of the money in your bank account won’t be enough to buy a basket of groceries.
If you’re retired, this will be even more of an issue. If you continue to work, your earnings will almost certainly increase to keep up with rising prices. If you’re retired, however, you’ll be trying to survive on savings that are becoming increasingly worthless.
After years of diligently saving for retirement, you’d discover that your savings were no longer sufficient to support you. To make ends meet, you’d have to drastically reduce your expenditures. If that didn’t work, you’d have to borrow money or ask family, friends, or charity for assistance.
What Happens to Debt and Loans During Hyperinflation?
If you’re already in debt, hyperinflation might be beneficial to you.
Let’s say you owe $50,000 on your school loans. The sum would remain the same, but the value of the dollars would diminish over time. The loan obligation that appears so large today could be worth less than a loaf of bread in the future.
That would be fantastic news for you, but it would be bad news for the bank that provided you with the loan. It would now consider your debt to be worthless.
The lender may attempt to compensate by boosting interest rates on new loans. However, in order to keep up with inflation, they would have to be raised so expensive that only a few individuals could afford them.
Furthermore, if consumers like you spent all of their savings, there would be no new money available to make loans with. The bank may possibly go out of business as a result of this and the decreased value of its current loans.
What Happens to Businesses During Hyperinflation?
Your bank wouldn’t be the only company in danger. Coffee shops, movie theaters, and barbershops in your neighborhood would all suffer. Their business would dry up if you and other consumers cut back on everything except fundamental needs.
Some of these businesses might eventually close. This would result in their employees losing their jobs, worsening their financial condition. If this happened to a large number of enterprises, the entire economy may implode.
Businesses that rely on imports would be the hardest hit. Let’s say your neighborhood coffee shop sources its beans from South America. As the value of the dollar declined, the price of those beans would rise.
Exporters would be the only enterprises that would prosper. Assume a local software company distributes its products across Europe. With the value of the dollar declining, its software would be less expensive than that of competitors from other countries.
Even better, the software firm would be compensated in euros. In relation to the dollar, those would be worth more and more over time.
What Happens to Stocks During Hyperinflation?
What’s good or bad for businesses affects their investors as well. If you have money in the stock market, this indicates that some of your stocks will suffer during hyperinflation. Others, on the other hand, would thrive.
In general, the value of your stocks would rise in tandem with the value of other assets. However, this would be irrelevant because each dollar would be worth less.
Stocks of companies that manufacture and sell fundamental items are likely to perform well. People would stockpile those goods, resulting in higher profits for the companies. Export-oriented companies’ stocks would also do nicely. Their stock prices would climb, and they might even increase dividends.
Companies that trade in luxuries, on the other hand, would suffer. People would have less money to spend on their goods and services if prices rose. The stocks of importers would suffer the most.
Overall, as long as you have a diversified portfolio, your stock investments should be fine. Some of your stocks would lose value, but others would gain, balancing everything out.
What Happens to Real Estate During Hyperinflation?
If you buy a home or invest in real estate, your investment will almost certainly increase in value. People would take money out of the bank and invest it in assets that would maintain their worth better, such as real estate, as the dollar declined in value.
House prices would rise as well, because new houses would be more expensive to construct. To recoup their costs, the builders would have to sell them for a higher price. The rising worth of these residences would increase the value of yours as well.
If you had purchased real estate with a fixed-rate mortgage, you would have been much better off. Your mortgage payment would remain the same, but you’d be able to pay it off in depreciated currency. That would be a far better deal than trying to keep up with rising rent costs.
However, if you tried to buy a house, you would have difficulties. Not only would housing prices rise, but so would mortgage rates. You’d be eligible for a considerably smaller mortgage and may be unable to purchase a home at all.
And that’s presuming you could still get a loan from a bank. Remember that if hyperinflation becomes severe enough, lenders may be forced to close their doors. Home purchasers and other borrowers are out of luck as a result.
What Happens to Government Spending During Hyperinflation?
The government would no longer be able to collect taxes from failing enterprises across the sector. Individuals would also contribute less since an increasing number of people would be unemployed. It would have less tax money to cover all of its bills as a result.
It may try to make up for the shortfall by printing additional money. However, this would exacerbate the inflation situation.
The only other option is for it to cease delivering essential services. People would no longer be able to collect their Social Security benefits. Medicare and Medicaid would no longer cover health-care costs. The mail would no longer be delivered by the post office. All of this would exacerbate the hardships already experienced by those who were already struggling.
What is the best way to recover from hyperinflation?
Extreme measures, such as implementing shock treatment by cutting government spending or changing the currency foundation, are used to terminate hyperinflation. Dollarization, the use of a foreign currency (not necessarily the US dollar) as a national unit of money, is one example. Dollarization in Ecuador, for example, was implemented in September 2000 in response to a 75 percent drop in the value of the Ecuadorian sucre in early 2000. In most cases, “dollarization” occurs despite the government’s best efforts to prevent it through exchange regulations, high fines, and penalties. As a result, the government must attempt to construct a successful currency reform that will stabilize the currency’s value. If this reform fails, the process of replacing inflation with stable money will continue. As a result, it’s not surprising that the use of good (foreign) money has completely displaced the use of inflated currency in at least seven historical examples. In the end, the government had no choice but to legalize the former, or its income would have dwindled to nil.
People who have experienced hyperinflation have always found it to be a horrific experience, and the next political regime almost always enacts regulations to try to prevent it from happening again. Often, this entails making the central bank assertive in its pursuit of price stability, as the German Bundesbank did, or changing to a hard currency base, such as a currency board. In the aftermath of hyperinflation, several governments adopted extremely strict wage and price controls, but this does not prevent the central bank from inflating the money supply further, and it inevitably leads to widespread shortages of consumer goods if the limits are strictly enforced.
Has the United States ever experienced hyperinflation?
The trend of inflation in the rest of the world has been quite diverse, as seen in Figure 2, which illustrates inflation rates over the last several decades. Inflation rates were relatively high in many industrialized countries, not only the United States, in the 1970s. In 1975, for example, Japan’s inflation rate was over 8%, while the United Kingdom’s inflation rate was around 25%. Inflation rates in the United States and Europe fell in the 1980s and have mainly been stable since then.
In the 1970s, countries with tightly controlled economies, such as the Soviet Union and China, had historically low measured inflation rates because price increases were prohibited by law, except in circumstances where the government regarded a price increase to be due to quality improvements. These countries, on the other hand, were plagued by constant shortages of products, as prohibiting price increases works as a price limit, resulting in a situation in which demand much outnumbers supply. Although the statistics for these economies should be viewed as slightly shakier, Russia and China suffered outbursts of inflation as they transitioned toward more market-oriented economies. For much of the 1980s and early 1990s, China’s inflation rate was around 10% per year, however it has since declined. In the early 1990s, Russia suffered hyperinflationa period of extremely high inflationover 2,500 percent a year, yet by 2006, Russia’s consumer price inflation had dropped to 10% per year, as seen in Figure 3. The only time the United States came close to hyperinflation was in the Confederate states during the Civil War, from 1860 to 1865.
During the 1980s and early 1990s, many Latin American countries experienced rampant hyperinflation, with annual inflation rates typically exceeding 100%. In 1990, for example, inflation in both Brazil and Argentina surpassed 2000 percent. In the 1990s, several African countries had exceptionally high inflation rates, sometimes bordering on hyperinflation. In 1995, Nigeria, Africa’s most populous country, experienced a 75 percent inflation rate.
In most countries, the problem of inflation appeared to have subsided in the early 2000s, at least when compared to the worst periods of prior decades. As we mentioned in an earlier Bring it Home feature, the world’s worst example of hyperinflation in recent years was in Zimbabwe, where the government was issuing bills with a face value of $100 trillion (in Zimbabwean dollars) at one pointthat is, the bills had $100,000,000,000,000 written on the front but were nearly worthless. In many nations, double-digit, triple-digit, and even quadruple-digit inflation are still fresh in people’s minds.
What do you do with cash in a hyperinflationary environment?
“While cash isn’t a growth asset, it will typically stay up with inflation in nominal terms if inflation is accompanied by rising short-term interest rates,” she continues.
CFP and founder of Dare to Dream Financial Planning Anna N’Jie-Konte agrees. With the epidemic demonstrating how volatile the economy can be, N’Jie-Konte advises maintaining some money in a high-yield savings account, money market account, or CD at all times.
“Having too much wealth is an underappreciated risk to one’s financial well-being,” she adds. N’Jie-Konte advises single-income households to lay up six to nine months of cash, and two-income households to set aside six months of cash.
Lassus recommends that you keep your short-term CDs until we have a better idea of what longer-term inflation might look like.
What countries were affected by hyperinflation?
When it comes to global poverty, the rate of inflation in a country’s economy is a critical element. Inflation happens when the value of a country’s currency falls while the cost of things rises. Inflation has an impact on many aspects of daily living, including national poverty rates, food, and medical supplies.
Inflation rates rise rapidly and uncontrollably, resulting in hyperinflation. When an economy’s inflation rate is at least 50% for thirty days, it is called hyperinflation. Hyperinflation is defined as high inflation rates that persist over a long period of time. Today, three countries are experiencing hyperinflation.
Venezuela
Venezuela was a tremendously profitable oil producer during the global energy crisis of the 1970s. Following the end of the energy crisis in the 1980s, Venezuela’s main export, oil, saw a significant drop in earnings, and the country’s economy began to suffer. Despite the drop in exports, Venezuela needs to spend a significant amount of money on the importation of basic necessities for its citizens. As a result of the country’s deficit spending, inflation resulted. Venezuelan banks then created paper currencies that were not backed by genuine wealth to pay for imported products.
Inflation in Venezuela has now reached historic highs, wreaking havoc on the economy. Since November 2016, when the inflation rate surpassed 50%, Venezuela has been in hyperinflation. Venezuela’s inflation is expected to reach ten million percent by the end of the year, according to the International Monetary Fund.
Poverty is widespread as a result of the current economic crisis. The poverty rate in Venezuelan families hit 87 percent in 2017. Food and medical supply shortages are endemic across Venezuela, on top of pervasive poverty. The nation’s health has deteriorated as a result of weight loss and the spread of sickness.
At the moment, the Venezuelan government is rejecting the IMF’s proposal to default on its debt. Venezuelan authorities to the United Nations have stated that the country requires internal structural improvements rather than international aid to prosper.
South Sudan
South Sudan’s economy is nearly totally reliant on oil. South Sudan is the newest hyperinflationary country, having gained independence from British sovereignty in 2011. South Sudan, on the other hand, was swiftly engulfed in a civil conflict that lasted from 2013 to 2018. Warfare-related damage to oil fields and other resources had a significant impact on South Sudan’s export revenue. Inflation occurred as a result of the nation’s struggle for resources and funding.
The current economic crisis in South Sudan has resulted in widespread poverty and food insecurity among the country’s citizens. According to United Nations data, 43% of South Sudanese households are food insecure. In December 2016, inflated food prices hit a high of almost 513 percent. Food price inflation fell to 51% by the end of December 2018, but it is still hyperinflammatory by definition.
South Sudan, unfortunately, is not currently focusing on any poverty-reduction projects. South Sudan’s overall inflation rate was anticipated to be 130.9 percent at the end of 2018 by the World Bank Organization; by the end of 2019, it is expected to drop to 49.3 percent, just under the hyperinflation threshold. However, due to the country’s financial instability, the International Monetary Fund and other comparable organizations will continue to keep a close eye on South Sudan for the foreseeable future.
Zimbabwe
Zimbabwe’s economy grew rapidly in the 1980s and early 1990s when the country declared independence from British rule and issued its own native dollar currency. Zimbabwe’s agricultural-based economy, on the other hand, suffered a huge setback in the 1990s due to a succession of crop failures. Zimbabwe’s economy began to fail as a result of high import costs and funding for the war. Zimbabwean banks raced to create surplus money in a frenzy to pay for commodities, resulting in hyperinflation.
In March 2007, Zimbabwe’s economy hit hyperinflation, barely passing the 50% mark. The next year saw a chaotic series of highs and lows in the country’s inflation rate, eventually hitting a startling 79.6 billion percent in November 2008. Zimbabwe was eventually compelled to ditch its local currency when its own citizens boycotted the excessively inflated Zimbabwean dollar.
Despite the nation’s inflation rate decreasing back down to 59.4 percent as of February 2019, Zimbabwe is still trying to minimize its cost of imports and improve its earnings from exports.
Potential Solutions
While there are several potential solutions to hyperinflation, dollarization the abandonment of a failing domestic currency in favor of a stable foreign currency is a common one. Montenegro, where the relatively weak Yugoslavian dinar was replaced with the euro, a more stable currency widely used across the European Union, is a remarkable success story of dollarization. Montenegro’s inflation rate peaked at 26.5 percent in 2001, prior to fully dollarization. As of 2019, the country’s inflation rate is under 1%, thanks to its adoption of the euro.
Zimbabwe, one of the three countries now experiencing hyperinflation, used to use this type of dollarization; but, as of 2019, it has abandoned it, resuming widespread economic issues. Overall, continuing dollarization may be the best way for these three hyperinflationary countries to achieve economic stability.
What is creating inflation in 2021?
In December, prices surged at their quickest rate in four decades, up 7% over the same month the previous year, ensuring that 2021 will be remembered for soaring inflation brought on by the ongoing coronavirus pandemic.