Hyperinflation can send an entire country into economic ruin. One of the most high-profile examples of hyperinflation was the accelerated rate of inflation that took over the Zimbabwean economy in the early 21st century. At its peak, the inflation rate was between 79,600,000,000,000% per month and 89,700,000,000,000,000% year-on-year, in mid-November 2008.
The Zimbabwean government stopped printing their currency due to the astonishing level of inflation they were dealing with. This issue ground to a halt in 2009 when they decided to use the US dollar as currency. However, this rate of inflation posed some major questions. What causes inflation to avalanche to such an uncontainable rate? Today we will look at three key issues that can cause inflation to spiral out of control.
Excessive money printing
When a central government begins to print their native currency excessively, it can lead to several problems that cause hyperinflation. Firstly, an excessive supply of money causes a country’s currency to become weaker internationally. This means that anything they export becomes more expensive, and any imported goods increase in price.
The Zimbabwean example resulted from the country’s poor economic outlook and mass printing of the currency, resulting in a perfect storm that rendered their currency essentially worthless. Western economies combat this by using central banks to monitor economic and fiscal issues to ensure that economists can curb any potential hyperinflation.
Many large economies will have stores of gold, which act as an effective hedge against inflation, to manage this risk. Other assets have been highlighted as potential stores of value. This includes cryptocurrencies such as Bitcoin. However, as it is still in its early stages, many people are unsure of its long-term value.
The second variable that can cause hyperinflation is an economic phenomenon known as demand-pull inflation. Demand-pull inflation is when overall demand increases at a high rate, making it extremely difficult for supply to keep up.
Prices accelerate in an alarming fashion during this scenario because demand far outstrips supply. Using the basic concept of supply and demand, a major demand for a product in short supply naturally drives the prices up. When the product is limited in supply, there is a potential for inflation to become completely out of control due to such a limited amount of said product.
This may sound like a strange concept. However, the idea of a small degree of inflation that lies outside the manageable range of 2% to 4% spells danger for an economy. Consider an economy that has an inflation rate of 10-15% – as it trickles down to the lower ranges of the economy, it spells danger for people who cannot afford to live.
Wages will need to rise in line with inflation so that people can still afford crucial goods and services. People who receive more money spend more on goods, and inflation can snowball.
So while small amounts of inflation can seem less dangerous than larger amounts of inflation, if it is not properly curbed or managed, it can result in hyperinflation on the horizon. It can also lead to people hoarding goods, leading to a reduced product supply. This can have a further negative effect on inflation. Managing an economy with a multitrillion-dollar GDP is a fine balancing act, and it takes several different variables to get it right and maintain stability.
Following our last point, when a government or a central bank sets out a fiscal policy designed to bring inflation back within a suitable range of less than 5%, they need to consider hundreds of different economic factors. It isn’t as straightforward as printing less money or raising interest rates. One wrong move could cause other parts of the economy to head downwards and cause just as many issues as hyperinflation.
To end on a more positive note, hyperinflation is extremely rare. We touched on the most notable example over the last 20 years: the issues in Zimbabwe. Hyperinflation also occurred in Germany following the end of World War I. It also occurred due to political corruption in the former Yugoslavia in the early 1990s, Hungary in the 1950s and most recently in Venezuela.
However, it is not an issue that people should be overly concerned about, as the examples are few and far between, and this timeline spans over a century. Governments are well equipped to deal with the dangers of hyperinflation now and can implement several measures to stop their currency from devaluing too sharply.
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