What Is Hyperinflation? Its Causes, Effects and Examples

Could You Survive Hyperinflation?

hyperinflation
At time of hyperinflation in Germany, 20's : banknotes in a bank in Berlin. Credit: APIC/Getty Images

Definition: Hyperinflation is when the prices of goods and services rise more than 50 percent a month. The severity of price increases distinguishes it from the other types of inflation. In galloping inflation, prices rise ten percent or more a year.

Causes 

Hyperinflation starts when a country's government begins printing money to pay for spending. As the money supply increases, prices rise as in regular inflation.

See What Are the Causes of Inflation?

But instead of tightening the money supply to lower inflation, the government keeps printing more money to pay for spending. Once consumers realize what is happening, they expect inflation. They buy more now to avoid paying a higher price later. Demand goes out of control. As this accelerates, they stockpile goods, creating shortages. That causes inflation to spiral into hyperinflation. For more, see Demand-Pull Inflation.

Effects

As mentioned, hoarding and stockpiling create shortages of durable goods. Even perishable goods, like bread and milk, become scarce as the economy falls apart. People lose their life savings as cash becomes worthless. For that reason, the elderly are the most vulnerable. Banks and lenders go bankrupt since their loans lose value and people stop making deposits. 

As hyperinflation occurs in the country, the value of the currency plummets in foreign exchange markets.

That sends importers out of business, since the cost of foreign goods skyrockets. Unemployment rises as companies fold. Government tax revenues also fall, and it has trouble providing basic services. 

There are two winners in hyperinflation. First, are those who took out loans. They find that higher prices make their debt worth less by comparison until it is virtually wiped out.

Exporters are also winners. The falling value of the local currency makes exports cheaper compared to foreign competitors. Exporters receive hard foreign currency, which increases in value as the local currency falls. See How Does Inflation Impact My Life?

Germany

The most well-known example of hyperinflation was during the Weimar Republic in Germany in the 1920s. First, the German government printed money to pay for World War I. From 1913 to the end of the war, the number of Deutschmarks in circulation went from 13 billion to 60 billion. The government also printed government bonds, which has the same effect as printing cash. Germany's sovereign debt went from 5 billion to 100 billion marks. At first, this fiscal stimulus lowered the cost of exports, and increased economic growth.

When the war ended, the Allies saddled Germany with another 132 billion marks in war reparations. Production collapsed, leading to a shortage of goods, especially food. Because there was excess cash in circulation, and few goods, the price of everyday items doubled every 3.7 days. The inflation rate was 20.9 percent per day. Farmers and others who produced goods did well, but most people either lived in abject poverty or left the country.

(Source: "Germany in the Era of Hyperinflation," Der Spiegel, August 14, 2009.)

Venezuela

The most recent example of hyperinflation is in Venezuela. ATMs only allow withdrawals of 30,000 bolivars, enough to buy lunch for two. Prices rose 41 percent in 2013, 63 percent in 2014, 121 percent in 2015, and 481 percent in 2016. The International Monetary Fund expects prices to rise 1,600 percent in 2017. The government will print a new 20,000 Bolivar note, which would only be worth $15 on the black market. That's because the largest note, the 100-bolivar bill, is only worth eight cents. It is also allowing rural shops to sell food at black market prices. Unemployment has risen to 21 percent, similar to the U.S. rate during the Great Depression. (Source: "Venezuela Throws in the Towel on Hyperinflation," ZeroHedge, October 27, 2016.)

Plummeting oil prices in 2014 eroded revenues to the government-owned oil companies. President Maduro has denied the problem instead of trying to resolve it. (Source: "Five Reasons Why Venezuela's Economy," CNN, January 20, 2016.)

Zimbabwe 

Zimbabwe had hyperinflation between 2004-2009. The government printed money to pay for the war in the Congo. Also, droughts and farm confiscation restricted the supply of food and other locally produced goods. As a result, hyperinflation was worse than in Germany. The inflation rate was 98 percent a day, and prices doubled every 24 hours. It finally ended was when people started accepting other currencies instead of the Zimbabwe dollar. (Source: "Zimbabwe Inflation," Cato Institute.)

America

The only time the United States suffered hyperinflation was during the Civil War. The Confederate Government printed money to pay for the war. If hyperinflation were to reoccur in America, the Consumer Price Index (CPI) would measure it. If you check out the current inflation rate, you will see that it is nowhere near hyperinflation. In fact, it isn't even in the double digits. Here's Why You Shouldn't Worry About Inflation.

The Federal Reserve prevents hyperinflation in America. Its primary job is to control inflation while avoiding recession. It does this by tightening or relaxing the money supply, which is the amount of money allowed into the market. Tightening the money supply reduces the risk of inflation, while relaxing controls on the money supply increases the risk of inflation.For more, see Monetary Policy.

The Fed has an inflation target of 2 percent per year. That's the core inflation rate, which leaves out volatile oil prices and gas prices. They move up and down rapidly depending on commodities trading.  That affects the price of food that trucks transport long distances. For this reason, the CPI also removes food prices from the core inflation rate.

If the core inflation rate exceeds 2 percent, the Fed will raise the Fed funds rate, and use other tools at its disposal to tighten them money supply, and lower prices again. Some experts say that the Fed's interventions to lessen the recession will cause hyperinflation. That is not a real threat since most of the funds the Fed pumped into the banking system sits in bank reserves. It has not gone into circulation, and so cannot cause hyperinflation. If the banks start to lend too much, the Fed can quickly raise its reserve requirement and lower the money supply. To understand more about this, see Monetary Policy Tools, and WHow Does the Government Control Inflation?

Surviving Hyperinflation

Despite the rarity of hyperinflation, many people are still worried about it. So, if it were to happen, what should you do? Three sound financial habits would help you survive hyperinflation.

First, be prepared by having your assets well-diversified. That means to balance your assets among U.S. stock and bonds, international stocks and bonds, gold and other hard assets, and real estate.

Second, keep your passport current, in case hyperinflation in your country makes your standard of living intolerable.

Third, ensure that you have a wide variety of skills and talents.  If you need a wheelbarrow full of cash to buy a loaf of bread, you should know how to bake bread. Hyperinflation makes a bartering system necessary when money is useless. A broad range of practical skills gives you an advantage when trading. For more, see How Can I Protect Myself From Inflation