Hyperinflation

A simple definition of “Hyperinflation” is extremely high, accelerating out of control inflation.

Hyperinflation is a situation where prices of everything rapidly increases and the currency quickly losing buying power.

One of the leading causes of hyperinflation is increase in money supply.  Prices of goods increase result from the rapid money creation which lead to a vicious circle to create even more money to fund the higher prices of goods due to lack of support of real economic growth.  Very high inflation rates or hyperinflation will eventually lead to loss of confidence in the currency as it quickly losing it’s value.  Due to rapid increases of prices, people will stop saving and quickly spend any money they receive which increase the velocity of money flow; this phenomenon  in turn will cause further acceleration in prices.

A simpler way to understand very high inflation or hyperinflation:

-In the board game Monopoly.  Let say you start playing with only 10 $1 bill for everyone, that is total of $10 per player.  Every time a player wants to build a house, it will cost about $1each.

As you can see in the example above, due to the increased of money supply, the price of goods increased also.  The true value of the house stayed the same but the buying power of the money decreases.  If the players decided to increase the money supply every 10 minutes, the prices of houses will rapidly increase.  The smart players will quickly spend their money soon as they receive them knowing the prices of everything will continue  go up quickly as the money supply increases.

 

Some of the negative effects of high inflation or hyperinflation:

1.  People will try to get rid of cash as quickly as possible by hording food, commodities and creating shortages.

2. Rapid increase in prices of everything, especially food and commodities.

3. High uncertainties in society.  Increase risk in business because of instability of prices.

4. Income redistribution and distortion.  The rich become richer and poor become poorer.

5. Existing creditors will lose extreme values of their loans previous lend out.

6. Workers don’t get compensated for the increase in prices rise.  Reduction in real      incomes

7.Savers and fixed income recipients will lose value of their savings and income.

8. Lower savings, lower investments.  Wipe out savings!

9. Increase in tax rates

10. Currency debasement

11. Rising prices of imports.

12. Could lead to civil unrest.

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