In economics, hyperinflation occurs when a country experiences very high and accelerating inflation. While the real values of the specific items generally stay the same, in hyperinflationary conditions the general price level within a specific economy increases rapidly as the functional or internal currency loses its real value very quickly.
The conventional thinking is that hyperinflation in the developed world is impossible because the velocity of money is close to zero. I find this argument flawed because #1) it ignores economic history and #2) it forgets velocity of money is a psychological concept first and an economic concept second. In other words money velocity is volatile and can reappear just as quickly as it vanishes in a crash. The Fed's thesis that "too much stimulus can be taken back later through a corrective tightening of policies" (Ahearne et al, 2002) is a classic cognitive bias that is at best arrogant and at worst dangerous. Many hyperinflationary episodes in history began with a period of very low velocity of money. In Weimar Germany there was no surface inflation and prices were remarkably stable between 1920 and 1921 as the government doubled the money supply. In that same period Germany had one of the healthiest economies in post-WWI Europe (on the surface) with a booming stock market and for a brief time the mark was even the strongest currency in the world.
Our fear of deflation may damn us to hyperinflation. Even if we fall over the waterfall of deflation first at the very bottom of that abyss may be the fire. It is not currently fashionable to talk about the risks of hyperinflation in modern developed economies. If you merely mention the concept you are quickly relegated to being an apocalyspe junkie, gold bug, or someone who spends too much time looking at the Mayan calender. The Fed and financial establishment seem to be on a public relations campaign to debunk the risks of inflation (I presume as a precursor to QEIII). Remember that psychological bias whereby our minds either completely ignore or exaggerate the probability of rare events based on an emotional connection? It works both ways. We have 100+ years of deflationary fear imprinting. The last Americans to experience hyperinflation on our soil were in the Confederate South during the Civil War. Very few investors or policy makers today have any direct professional and more importantly emotional experience in a hyperinflationary reality.
Hyperinflation reached its ultimate end. Farmers refused to take any form of paper money for their crops. The harvest of 1923 sat in farmers’ warehouses while supermarkets in the cities were empty. Starvation and civil unrest loomed.
The state itself threatened to break apart. On Nov. 9, 1923, Nazi Party leader Adolf Hitler attempted to seize power in Munich, and from there march on Berlin, in the model of Benito Mussolini’s successful March on Rome in October 1922.
Germany, as is well known now, had a hyperinflation from 1919 to 1923. At the end, the mark was worth one trillionth of its original value. Afterwards, the new German mark was pegged to gold, at its prewar parity.
How did this happen? How did the new gold standard emerge?
The first thing that happened was that Gustav Stresemann was appointed Chancellor on Aug. 13, 1923. On Sept. 26, 1923, in the midst of hyperinflationary chaos, he suspended seven articles of the Weimar constitution, and declared a State of Emergency. This effectively rendered Germany a military dictatorship.
Starting in January 1992, what was left of Yugoslavia endured the second-highest and second-longest hyperinflation in world history.
It peaked in January 1994, when the official monthly inflation rate was 313 million% — 4 orders of magnitude higher than the Weimar hyperinflation, but well below Hungary's record. The Yugoslav hyperinflation lasted 24 months, only two months shorter than the Soviet hyperinflation in the early 1920s.
The results were devastating. Long before NATO struck Yugoslavia in 1999, Mr. Milosevic's monetary madness had already destroyed the economy. Wreck an economy, then start a war: It's an age-old power-preservation ploy.
Zimbabwe has entered the hell of hyperinflation. Indeed, inflation in March rose by well over the 50% monthly threshold for qualifying as hyperinflation. The reporting of Zimbabwe's travails invariably includes the standard reference to Weimar Germany's 1922-23 hyperinflation, in which the monthly inflation rate peaked at 32,400%.
On November 5th and 6th, 1923, a mob of 30,000 people rioted in Berlin to protest the misery brought on by the hyperinflation. Many of these Germans blamed their plight on Jews who they mistakenly believed controlled the German economy and were involved in an international conspiracy to dominate the world economy. Two major Jewish organizations protested against the rioting and the antisemitism which made 1000 Jewish-owned businesses a prime target of the riots.
When associated with depressions, hyperinflation often occurs when there is a large increase in the money supply not supported by gross domestic product (GDP) growth, resulting in an imbalance in the supply and demand for the money. Left unchecked this causes prices to increase, as the currency loses its value.
When associated with wars, hyperinflation often occurs when there is a loss of confidence in a currency's ability to maintain its value in the aftermath. Because of this, sellers demand a risk premium to accept the currency, and they do this by raising their prices.
One of the most famous examples of hyperinflation occurred in Germany between January 1922 and November 1923. By some estimates, the average price level increased by a factor of 20 billion, doubling every 28 hours.
-Hyperinflation is a fiscal phenomenon, resulting from unsustainable deficits. Historically, it occurs after central banks monetize a large amount of debt.
-It's actually more closely related to deflation than inflation "as hyperinflation can be viewed as the result of a failed attempt at printing money to avoid the deflation that would be caused by austerity."
-Currently, it is a concern for the some major currencies because their path is exactly like that described above; large fiscal deficits have forced austerity and deleveraging, and countries are responding with large scale monetary easing.
-The warning signs are here for several economies. UBS research finds that hyperinflation tends to happen when deficits financing more than 20 percent of government expenditure. India, the US, Japan, Spain and the UK all qualify.
-The Eurozone as a whole is below that threshold, Japan is a creditor nation, and India's currency is not hugely vital to markets.
-"We therefore think that the hyperinflation risk to global investors is largest in the US and the UK."
Definition of 'Hyperinflation'
Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is a situation where the price increases are so out of control that the concept of inflation is meaningless.