It was late evening, we were talking about the upcoming festive season, and suddenly we started getting many notifications. They all had one thing in common, hyperinflation.
A series of tweets, news articles, social media posts, and other blog posts about hyperinflation was triggered because Jack Dorsey, CEO, and founder of Twitter, stated that the sudden rise we see in prices, especially fuel and consumables, could only be the beginning (1).
Hyperinflation is going to change everything. It’s happening.
— jack⚡️ (@jack) October 23, 2021
In a follow-up tweet, Dorsey further noted that an inflation rate of 16% was possible in the US and the rest of the world.
All in all, he sparked a new wave of inflation exposition over the last week. However, most experts have stated that while we can not deny inflation, we should not expect hyperinflation to happen any time soon.
Now, before we dive any further into what experts worldwide have been saying, let’s understand what hyperinflation is.
According to Investopedia (2), “hyperinflation is a term used to describe accelerated, extreme, and out-of-control general price surge in an economy.”
While we describe inflation as a measure of the speed of price rise for goods and services, hyperinflation is a term used for rapidly surging inflation, typically measuring over 500% a month.
Even though hyperinflation is a rare occurrence for most economies, it has happened several times throughout history, even in developed nations like Germany, China, Hungary, Russia, and Argentina.
It is important to understand that hyperinflation usually happens in times of economic turmoil. It can include war, disorders in the underlying production economy, etc., in tandem with any central bank printing an excessive amount of cash. To know more about what happens when countries do it, read our previous story, Countries Are Printing More Money Than Ever; Should India Follow?
To put it simply, we measure normal inflation in terms of price increases happening a month, 5%, 10%, or so. Whereas, we say hyperinflation happens when the inflation rate exceeds over 50% for over a month.
Consider it with an example; imagine you purchased your weekly grocery for 500 USD in the first week of the month. However, when you purchased the same things again in the second, you instead paid 750 USD, about 1,125 USD in the third week, and so on.
And if your wages don’t keep pace with the inflation, the standard of living will go down since you and people, in general, will no longer be able to pay for any basic requirements and cost of living rates.
In short, there can be numerous and major consequences of hyperinflation in any economy. People may start panic buying, including perishables like food, because of price surges, which can create supply shortages.
When there is an excessive surge in prices, currency starts to lose its value, whether in cash or savings in your bank account. In severe cases, it even becomes worthless since it has far less buying power. Hyperinflation can make people bankrupt at a significant pace.
There are also chances that people will stop depositing their money in banks and even go out of business. A nation going through a hyperinflation crisis may also experience a sharp drop in its tax revenues since businesses and consumers can no longer pay them. It can lead a nation’s government to collapse as they even fail to offer basic services.
While numerous reasons can lead to hyperinflation, there are two main causes:
- Excessive money supply
- Loss of confidence in an economy
Hyperinflation Crisis Examples
Previously, there have been multiple instances of hyperinflation. One of the most prolonged and devastating episodes of it happened in the 1990s with Yugoslavia.
In 1991, it was found that Slobodan Milosevic, leader of the then Serbian province, had pillaged the country’s treasury by issuing 1.4 billion USD loans to his cronies from the Serbian central bank. The nation was on the verge of dissolution and experienced inflation at rates over 76% yearly.
The theft forced the central bank to print excessive money to take care of its financial obligation. However, hyperinflation quickly enveloped the economy, erased the country’s wealth, at least what was left of it, and forced people to barter goods.
Notably, at that time, the inflation rate doubled every day until it reached an abstruse 313 million % a month. Meanwhile, the central bank continued printing more money to keep the government running while the entire economy went downhill.
Consequently, there were food shortages, people’s income dropped by over 50%, and production nationwide almost came to a complete halt. In due course, the new government replaced its currency with the German mark, which led to a stable economy (3, 4).
Below are some indicators of hyperinflation existence (5):
- The population, in general, prefers to keep its assets in non-monetary forms or relatively stable foreign currency. Amounts of the local currency are immediately invested in retaining the purchasing power.
- Sales and purchases on credit happen at prices that make amends for the surmised loss of purchasing power through the credit period, even if it is short.
- Interest rates, prices, wages are in conjunction with a price index.
- The collective inflation rate over three years exceeds or approach 100%
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According to Steve Hanke, an economist at Johns Hopkins (6), “There have been 62 certified hyperinflations worldwide so far. However, at present, no nation is experiencing any hyperinflation. @Jack should know better than to tweet public statements irresponsibly.”
There have been 62 certified hyperinflations in world history. At present, no country is experiencing hyperinflation. @jack should know better than to tweet irresponsible public statements. https://t.co/elNQdp1Zy2
— Steve Hanke (@steve_hanke) October 23, 2021
Janet Yellen, a Secretary at the US Treasury, stated that she expects inflation to drop to reasonable levels in the second half of next year. She told CNN that (7) “On a 12-month basis, the inflation will remain high into the upcoming year because of what’s already happened. However, I expect improvement by the end of 2022.”
Notably, India’s retail inflation based on CPI, Consumer Price Index as of August 2021 was 5.3%, moving downward from its peak of 6.3% in May and June, and is expected to ease further (8).
Okay, so far, we have understood the difference between hyperinflation and inflation, what scenarios we can expect during a possible hyperinflation crisis, and what experts are saying about it.
Now, the question remains, why does Jack Dorsey think that a hyperinflationary crisis is around the corner?
Well, things do look bad right now. There is indeed higher inflation, whether we consider the US economy, India’s economy, or price surges worldwide.
So, is Dorsey looking at some civilization collapse that no other experts can’t?
No, it doesn’t look like it.
Well, according to a Business Insider report (9), the high >5% inflation we have seen over the past few months is not hyperinflation. Of course, it is uncomfortable. However, as discussed above, hyperinflation involves the sudden destruction of a currency’s currency and the rapid downfall of typical spending habits.
As far as history tells us, in extreme cases of hyperinflation, the money is not even worth the paper it’s been printed on (10).
In short, even though high inflation comes and goes for several reasons, hyperinflation requires some unique cases. We have seen that it typically happens alongside some extraordinary geopolitical events that involve existential crises to the existence of a nation.
For example, consider the hyperinflation of Germany, which happened after WW1. As the country became ravaged from losing the war, it was forced to pay war reparations and even endured a government change imposed by the victorious allies. Regardless, it was impossible for the government to repay debts and rebuild.
Hyperinflation started as Germany grappled with losses, consumer demand shrunk dramatically. People lost faith in Germany’s currency, further lowering its value. The German government printed more money to make up for its postwar debts, compounding the issue further tanking its currency’s value.
In other words, the disaster was not “only a case of money printing going wild”; however, it was an amalgam of catastrophes made worse by exorbitant money printing.
“It was a combination of war, change in regime, fragile mental state, foreign-denominated debts, and productive collapse that led to excessive money printing, collapse in the tax system, and ultimately leading to hyperinflation,” stated Roche (13).
Countries also run the risk of hyperinflation when they give up exclusive control over their currency.
For example, a government may take on a big debt dominated by a foreign currency, as was the case with Germany, Weimar, which had to print huge sums of money to exchange for foreign bills, which reduced its worth.
A country can also peg its currency to another nation’s money. However, giving up currency control is a sure sign that a government is increasingly unstable and at the risk of collapse, stated Roche.
Instances of hyperinflation can also happen if nations suffer complete regime change or excessive corruption of the government.
While changes in the regime can be helpful in the long-term, they can also lead to a new government being under high skepticism, stated Roche. It was seen throughout Europe after WW1 as the uncertainty tanked currencies’ values.
Mismanagement and corruption of the economy can lead to similar uncertain scenarios. As Roche stated, any currency’s value depends on an agreement between the government and the general population that the money is worth.
Meaning, if the government is seen as corrupt, “the other party will want out of the agreement,” stated Roche. In the worse case, it can lead to the currency’s downfall.
Hence, for hyperinflation in the United States, India, or any other country, one would have to bet on “a highly unusual and severe scenario” which coincides with an overseas-denominated debt crisis, a collapse of the economy, a sudden fall in their population’s confidence, and the “destruction of their reserve currency,” explained Roche.
While we have our share of issues; however, such kind of government collapse, the meltdown of the economy, or crippling war loss, which can lead to hyperinflation, is not among them, at least as far into the future we can predict (14, 15).
While inflation figures have been rising worldwide as the aftermath of the pandemic, there is a clear distinction between supply-driven inflation and consumer-driven inflation. Click here to know more about the world economy experiencing a crisis.
And since the inflation, we are witnessing now is a drag on the economy, which is completely different from the scenarios leading to hyperinflation; a complete disruption of economic processes, the present inflation can’t be considered hyperinflationary.
Therefore, we can conclude that while there is a real inflationary pressure that may stay with us for another year or so, we are not witnessing any cataclysmic scene that could bring us a complete disruption of our financial system in the long or short run.