Hyperinflation: When Fiat Currencies are Worthless
What is hyperinflation?
According to Investopedia, “Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy. While inflation is a measure of the pace of rising prices for goods and services, hyperinflation is rapidly rising inflation, typically measuring more than 50% per month.”
Hyperinflation is not something new, it has already occurred many times in past in countries such as China, Russia, Germany, Hungary and Argentina.
How does it occur?
Excessive money supply for fiat currencies.
As fiat are no longer backed by gold, central banks simply create more out of thin air.
A great example (and concern) of this is what the banks are currently doing right now during the COVID-19 pandemic.
The response to an economic depression is usually an increase in the money supply by the central bank. They call this “stimulus” when in fact in simple terms it just means print as much money as they want. They are doing this so that they can pump the money back into the economy to support consumers and business to spend and invest.
If the increase in money supply is not supported by the growth of the economy which is measured in GDP, it can then lead to hyperinflation. Once this happens everything becomes ridiculously expensive, businesses raise their prices to maintain profits, this then leads to consumers paying more for the same product and then the bank has to print more money as they can’t keep up with the inflation and then eventually leading to making the currency worth almost nothing.
Loss of confidence in the monetary system
A great example of this was the financial crisis of 2008 which led to many big companies going bankrupt.
Followed by a rise in unemployment as businesses couldn’t pay their employees or had to shut down.
When something similar happens investors focus on commodities, like gold that is seen as the ultimate safe haven and a store of value.
The currency value depreciates further when people sell their own currency to buy another currency’s investment i.e. for instance investors/traders might have bought the Australian dollar as their interest rates were usually higher than other currencies.
People would also turn to the US dollar as it is seen as the “safe-haven currency”. I am not sure how long that will last anymore as they have an astonishing debt of almost $28 trillion dollars If you are a USA taxpayer, your personal share of the debt is $217,000! as I write this article today on the 16th October 2020. Check out todays debt here: https://www.usdebtclock.org/
Hyperinflation: When Fiat Currencies are Worthless
If you are not in the USA then don’t think your countries economy is any healthier, check out where you are in the world top 20 debtors: here is the world debt clock https://www.usdebtclock.org/world-debt-clock.html
Some cryptocurrencies are now beginning to be seen in a similar light (as a safe haven/store of value) as was recently explained by George Ball, ex CEO of the Prudential group, when he said on the 5th September 2020 about the fact that at the end of the Covid pandemic a huge bill has to be paid for.
“When this government assistance program comes to end, the borrowed money must be repaid.” Therefore, the critical question according to Ball, is how the government is going to finance this payback.
“Are they gonna raise taxes that high or if not, are they going to print money?
If they print money that debases the currency and probably even Treasury Inflation-Protected Securities (TIPS) can be corrupted,” said Ball.
When he was asked what assets should investors go to?“..the very wealthy investor and trader will turn to Bitcoin or another crypto currency…
Germany
To evaluate this further let’s go back in time and look at the catastrophic event when the Germany economy collapsed in 1923 after the First World War where cash became nearly worthless. It was worthless to the point where they needed 200 billion to buy a loaf of bread! At one point, 4.2 trillion German marks was worth just one American dollar. It got so bad that the banks didn’t know what to do with all the cash they had which was worthless.
The people used the paper money to make fire instead of wood, some used them to make clothes. Kids were also seen using the banknotes to make kites. At this point we get the idea that when hyperinflation occurs the currency that once had a value of a certain amount is pretty much just like any other paper as it has almost no value anymore.
How did this all happen? It didn’t just happen overnight but the German government printed unbacked currency and borrowed money to finance its dream of conquering Europe. Their plan was to conquer resource-rich territories to pay off the debt. However, their huge risk didn’t pay off when they lost the war in 1918 and ended up with enormous debts alongside huge, punitive reparations owed to the Allies under the Treaty of Versailles. This then led to many German shops going back to the barter system as we did back in the old days using commodities as a means of payment in exchange of another item.
I am not sure why the guy is guarding this pile of cash as it was about to be burned!
Zimbabwe
Another example was not too long ago when Zimbabwe had hyperinflation during 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% a day, and prices doubled every 24 hours. This ended when the currency changed its currency to the U.S dollar.
Hyperinflation: When Fiat Currencies are Worthless
In April 2009, Zimbabwe stopped printing its currency, with currencies from other countries being used. In mid-2015, Zimbabwe announced plans to have completely switched to the United States dollar by the end of that year.
In June 2019, the Zimbabwe government announced the reintroduction of the RTGS dollar, now to be known simply as the “Zimbabwe dollar”, and that all foreign currency was no longer legal tender. By mid-July 2019 inflation had increased to 175%, sparking concerns that the country was entering a new period of hyperinflation. In March 2020, with inflation above 500% annually, a new taskforce was created to assess currency issues. By July 2020 annual inflation was estimated to be at 737%.
Venezuela has also suffered from inflation problems since the turn of the century. Inflation substantially grew from 40.6% in 2013 to 121% percent in 2015. Then Venezuela spiralled into hyperinflation beginning in 2016 with an inflation rate of 254.% & peaking at over 1,000.000% in 2018
References
https://www.thebalance.com/what-is-hyperinflation-definition-causes-and-examples-3306097
