Inflation Gone Wild-Hyperinflation!

Inflation Gone Wild-Hyperinflation!

 inflation_1811026bAs the word suggests, Hyperinflation occurs when the rate of inflation goes very high, sometimes over 5-10% per hour, and it’s almost impossible to curb the rate of inflation. In such a scenario, price level quickly increases and the value of currency keeps on decreasing. The price of goods continuously increase and the supply of money increases with it. Such a condition occurs when a country is under huge debt which it tries to pay by printing more and more currency, which eventually hits its economy very hard. It is generally associated with wars and its aftermaths, social changes in the country leading to a condition where revenue from taxes is lower than the spending of the country.

Causes of Hyperinflation

Hyperinflation occurs when government has no way of generating money in the economy, other than printing money. This rapid increase in the supply of money is not concurrently met by the growth in output of goods and their supply.

Since the inflation grows sometimes even on hourly basis, the value of currency also goes down at the same rate. If 1000 units of a currency are used to buy footwear at a particular time, same amount may not suffice for even 50% of its cost after a few hours. This leads to a situation where shopkeepers tend to hoard things because the same thing will give them a greater value in sometime. People may also tend to hoard the essentials as there is a constant fear that the same good may not be available after few hours. Thus people buy ample quantities of food or other essentials, which makes their supply in the market low and this again further leads to increase in prices

Thus it leads to a vicious circle where government prints money to spend on its people which further leads to increase in prices and in turn government has to print more money again.

Countries hit by Hyperinflation

One of the most famous examples of Hyperinflation is Weimar Germany after 1st world war. The Treaty of Versailles assigned the blame of war to Germany and it was to pay reparations to the Allies. In order to pay these reparations, Germany began mass printing of notes to buy foreign currency, which further increased the inflation rate in Germany and devalued Papiermark(German currency). Inflation peaked in Germany in November 1923 and at that time the inflation rate was 29525 %.

Hungary after World War 2 recorded worst inflation ever. The highest denomination in mid-1946 was 100, 000, 000, 000, 000, 000, 000 pengo. The rate of inflation at that time was 41.9 quintillion percent.

One of recent instances of hyperinflation occurred in Zimbabwe. Zimbabwe after its independence in 1980 began land reforms, which focused on taking land away from white farmers and giving it to black farmers. As a result, food production in Zimbabwe suffered and eventually revenue from exports of food were badly hit. Thus in order to meet its spending the government had to print more money with higher values. The inflation rate went highest in November 2008 to 7.96 billion percent and in January 2009, $100 Million banknote was issued.

Effects of Hyperinflation

The most serious concern associated with hyperinflation is that it transfers wealth from the hands of people to the government. It wipes out the savings of the people, and triggers hoarding of goods. Economy is hit badly and the investors lose trust in the country.

To end Hyperinflation, the government takes drastic measures such as cutting down its expenditure heavily or altering the currency basis. One way can be use of a foreign currency as national unit of currency. Also, the Central Bank becomes very stringent about maintaining price stability to avoid any recurrence of hyperinflation.