Hyperinflation is inflation which is "out of control", a condition in which prices increase rapidly as a currency loses
its value. No precise definition of hyperinflation is universally accepted. One simple definition requires an monthly
inflation rate of 50% or more. A vicious circle is created in which more and more
inflation is created with each
iteration of the cycle. It becomes visible when there is an unchecked increase in the money supply or drastic debasement of coinage.
Characteristics of hyperinflation
The following signs suggest that an economy may be in hyperinflation:
- The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency.
Amounts of local currency held are immediately invested to maintain purchasing power.
- The general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable
foreign currency. Prices may be quoted in that currency.
- Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during
the credit period, even if the period is short
- interest rates, wages and prices are linked to a price index; and the cumulative inflation rate over three years
approaches, or exceeds, 100%
Effects of Hyperinflation
Unlike inflation, which some economists feel can be a justifiable policy choice, hyperinflation is always regarded as
destructive - it effectively wipes out the purchasing power of savings held as paper assets of the country afflicted
with it, distorts the economy in favor of extreme consumption and hoarding of real assets - causes the monetary base,
whether specie or hard currency - to flee the country, and makes the afflicted area anathema to investment. Hyperinflation
is met with drastic remedies, whether shock therapy of slashing government expenditures or altering the currency basis.
The aftermath of hyperinflation is equally complex, as hyperinflation has always been a traumatic experience for the
area which suffers it, the next policy regime almost always enacts policies to prevent its recurrence. Often this means
making the central bank very aggressive about maintaining price stability
as is the case with the German Bundesbank, or the move to some hard basis
of currency for example the gold standard or a currency board. Many governments have enacted extremely stiff wage and
price controls in the wake of hyperinflation.
Please have a look at some sample banknotes from the Pre-Inflation,
Early Inflation or Hyper Inflation periods.
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