The Emerging Evidence Of Hyperinflation

02/11/2020 Image
Hyperinflation is a horrifying circumstance that can be detrimental to the economy of any country. As such, the National Inflation Association (NIA) is dedicated to identifying the early warning signs that hyperinflation is imminent. However, economic experts believe that most of the early warning signs are already here.

What is Hyperinflation?

Hyperinflation occurs when there's a rapid monetary devaluation in extreme cases. That happens when inflation gets out of control to the point where normal concepts of prices and value are meaningless. For instance, it wouldn't come as a shock to carry a wheelbarrow of cash to buy a loaf of bread in extreme cases of hyperinflation.

Often, economists describe hyperinflation as inflation exceeding 50% every month though there's no strict numerical value to define the phenomenon. However, this catastrophic economic nightmare has occurred several times throughout history, with some extreme cases exceeding the conventional 50% per month threshold.

Historical Evidence of Hyperinflation

Historically, Weimar Germany is probably the most popular example of hyperinflation, though not the worst. Germany went through a severe political and economic shock after World War I, primarily because of the terms stipulated in the Versailles Treaty that brought the war to an end.  

According to the treaty, the Germans had to pay reparations via the Bank for International Settlements for damages to the victorious countries. These reparation terms made it impossible for the government to meet its obligations, and the country couldn't make the payments.

Germany was forced to trade to get acceptable hard currency as they couldn't make payments in their currency. However, they printed more cash to compensate for the difference, and their economy quickly took a turn for the worse. At this moment, Hyperinflation in Weimar reached 30,000% monthly, with prices doubling every few days.

Hyperinflation Today

Today, hyperinflation is evident in several developing countries like Zimbabwe and Venezuela. However, most western countries today seem to have methods to control inflation and keep their currency's value in check. That means keeping the inflation rate close to 2% as advised by the European Central Bank. The 2% isn't strictly calculated, though the ECB believes it's acceptable for a steadily growing economy.

With lots of economic uncertainties this year, most developed countries' inflation dropped rapidly since 2008, threatening deflation. Deflation happens when consumers are encouraged to delay their spending mainly on luxurious goods because they foresee a future price drop. However, most western governments have continued to financially assist their citizens to avoid deflation as they continue looking for a more permanent solution.

While this financial aid could be the first early indicator of hyperinflation soon, it's essential to keep the citizens calm and alive. The alternative of leaving them without financial help could also lead to dire consequences like depression. That means that governments must strike the right balance to stay off both situations.
Monetary planners are also fond of using interest rates to stimulate industrial investments to boost the economy. However, managing interest rates for economic gain, including the recently introduced negative rates in the U.S, has proven to be a regrettable failure.

Bottom Line

Considering the recent turn of events in the global economy, it's evident that the reality of an unbacked dollar is slowly approaching. That means there's a need to change the inflationary policy to avoid bringing down the international fiat order it's based on.

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