Economy

A General Overview of Hyperinflation

Hyperinflation is an extreme case of monetary devaluation that is so rapid and out of control. In general, hyperinflation is characterised by 50% inflation rate or more monthly, although there is no strict numeric definition. Even though hyperinflation is considered as a rare phenomenon, it has occurred as many as 55 times in the 20th century in countries such as China, Russia, Hungary, Yugoslavia and many more.

More often than not, hyperinflation is caused by war or its impact. Wars always result in a great loss. Hence, governments print money to pay for the increased expenditure as they have massive budget deficits and no foreign government would invest money due to distrust in the economy. Consumers lose confidence in the currency and so the value of the currency in forex market plummets. In such a case, savings become redundant, depositors stop depositing money and so financial institutions go out of business and tax revenue falls. There is a situation of demand-pull inflation which implies that the demand is much greater than the supply of goods and services. Consumers start anticipating inflation so they start hoarding essential goods in order to avoid paying higher price later. This increases the velocity of money in the economy and this excessive demand can aggravate the people’s crises by creating massive shortage of goods.

When associated with economic depression, hyperinflation is triggered with a significant increase in money supply, not supported by a simultaneous increase in the gross domestic product (GDP), thereby resulting in an imbalance between demand and supply for money. If left unchecked, this causes erosion or loss in the value of money and within a short span of time the average price level increases exponentially. Supply shocks and natural disasters can fuel hyperinflation as well.

The outbreak of hyperinflation in Weimar, Germany in the early 1920s actually had its roots in the World War I. Post the First World War, Germany’s tragic loss resulted in huge debt in the form of war reparation. It owed a lot of money to its allies. From 1913 to the end of the war, the number of Deutschmarks in circulation went from 13 billion to approximately 60 billion. Lack of sufficient funds forced the central bank, Reischbank, to print more money. The mark-dollar exchange rate peaked to 4.2 in 1914 to around 4.2 trillion by November 1923. At its worst, prices hiked so fast that waiters had to climb on tables to call out new menu prices in restaurants every 30 minutes. Banknotes became redundant and were even used as wallpapers. Bundles were given to children to play with, as they were cheaper than toys.  On January 1923, France marched 100,000 soldiers into Germany’s Ruhr valley and confiscated the coal and seized control of the mines, this caused a fatal blow to Germany’s industrial production.

Since an entire region came to halt, a crucial source of tax revenues dried up. As the Ruhr valley was no longer permitted to deliver coal, Germany was forced to acquire its fuel from elsewhere, often from other countries at a great cost, thereby depleting its much-needed foreign currency reserves. At the same time, millions of Germans were living in absolute poverty. People were starving and a great number of children suffered from deficiency diseases such as rickets and tuberculosis. On November, the new currency (Rentenmark) was introduced and it replaced the worthless Mark. This ultimately led to stabilisation of prices over time.

In 2008, Zimbabwe had the second highest rate of hyperinflation on record. The estimated inflation rate was 79,600,000,000, with a daily rate of 98.0. The government printed money to fund the war at Congo. Also, there was a supply shock in terms of agricultural production due to the drought and farm confiscation. As a result, the hyperinflation became worse than Germany. The hyperinflation was finally controlled when Zimbabwe changed its currency to the US dollar.

The most recent incident of hyperinflation occurred in Venezuela. Both political and economic implications are the cause of rapid inflation in Venezuela. The former President of Venezuela, Hugo Chavez, left a huge budget deficit by incurring massive expenditure on social reform policies. On the economic front, Venezuela was highly dependent on oil as the source of revenue. The sudden drop in the price of oil in 2014, from $100 a barrel to $33 a barrel, was a huge shock to the economy as they could no longer solely depend on oil to carry out expenses. As a result of hyperinflation, there is complete havoc in the county. The shortage of medicine, food, electricity and other necessities are leading to riots and protests. Children are dropping out of school due to starvation. Over a million people have fled the country. Venezuela continues to fight inflation and at the moment the future does not look bright, considering the political scenario created by Hugo Chavez’s successor, Nicolas Maduro.

Picture Credits : sprottmoney.com

 



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