What Is Hyperinflation ?

Hyperinflation is what, in layman terms can be called as the economic equivalent of doomsday. Modern societies have become more and more accustomed to having inflation in their daily lives. This has been the case ever since the world went off the gold standard at the “Bretten Woods Conference” and almost all countries worldwide accepted fiat currencies as being the basis of their monetary system.

The popular view is that inflation is a harmless byproduct of the modern monetary system. Hyperinflation, as some economists describe is this very same “harmless” inflation on steroids. It is nothing but a result of rising rates of inflation for multiple years.

Hyperinflation is a grim reminder as to how inflation can wreck havoc on a monetary system and bring about it’s complete breakdown overnight! In this article, we will have a look at this interesting phenomenon. You can obtain a more detailed explanation from the following video.

Imagining Hyperinflation

The economic definition of hyperinflation is defined in terms of percentages and figures. This definition is interesting to read but to the average person they appear like big numbers. The average person is unable to fathom what hyperinflation really means until they are asked to imagine the following scenes:

  • Imagine a scenario wherein a sweeper is sweeping on the streets except for the fact that he is sweeping away currency notes! Dollar bills and pounds just lying on the street as if they are worthless. The sweeper doesn’t steal these notes and run away because these notes are indeed worthless. He quietly sweeps the streets, disposes millions of dollars in the garbage and heads home!

  • Imagine a woman trying to keep her house warm in winters. Usually people use wood or old newspapers to keep the fire burning. Imagine a world where a woman uses currency notes to keep that fire burning. They are so worthless that the woman feels if she could heat her house by burning away millions of dollars, she has got a good deal!

Now, once again read the words “complete breakdown of monetary system” and understand this is what the world looks like when this economic cancer of hyperinflation wrecks havoc. There is no such thing as “normal life” during the period of hyperinflation. Everything about life becomes bizarre and unreal.

Consequences of Hyperinflation

Now since we know a fair bit about what hyperinflation really means, let’s look at the consequences that hyperinflation is capable of causing in our daily lives:

  • Daily Price Rise: Hyperinflation is a period when trust is in short supply. Everybody wants to buy their essentials before the money loses its value. It is for this reason that they all rush to spend their money as soon as they receive it causing a drastic rise in prices. In worst cases of hyperinflation, prices were doubling every couple of hours.

  • Daily Payment of Wages: Since prices of goods are rising daily, wage earners will not wait till the end of the month or week to obtain their wages. They want their wages to be paid to them every day. A lot of businesses have to shut down because they do not have the cash flow to sustain this, complicating the problem further!

  • Breakdown of Monetary System: In most cases there is complete breakdown of the monetary system. For an interim period of time, the nation resorts back to the gold standard. Later, usually the World Bank or IMF interferes and introduces some form of currency to stabilize the system. Usually currencies like the dollar and pound sterling are used for this purpose.

  • Savings Wiped Out: Since so much excess money is created, the amount of money lying in the bank loses its value. It does not matter whether there was a billion dollars or one single dollar in a bank account. In the event of hyperinflation their value is the same i.e. zero!

Major Currencies in Crisis: Another common misconception is that hyperinflation affects only economies in decline or those economies which are badly managed. This isn’t the complete truth. The first real known case of hyperinflation was observed in the Roman Empire and it began when the empire was at its helm bringing the whole system down. There have been many more cases in recorded history wherein major empires have been brought down by hyperinflation.

If we look at the current scenario, almost all world currencies i.e. the dollar, the pound, the yen and the Swiss franc are dangerously close to a hyperinflationary spiral. It would not be farfetched to think that one or all of these currencies could soon face a major crisis.

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Managerial Economics