Hyperinflation is a condition in which price levels increase rapidly as the nation’s currency loses its value.
In other words, hyperinflation is extremely rapid inflation.
This 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.
Economists generally use this term to refer to episodes when the monthly inflation rate exceeds 50%.
As the money supply increases, the demand for money goes down. In effect, hyperinflation tends to result in a rapid decrease in the value of money.
Not only does hyperinflation make money worthless, it simultaneously destroys an economy.
For example, Venezuela’s hyperinflation started in 2016. Since then, the country’s economy has crashed.
During the Great Financial Crisis, Zimbabwe recorded the second-highest incidence of hyperinflation in history. The country’s inflation rate in November 2008 was an insane 79,600,000,000% (a daily inflation rate of 98%).
What causes hyperinflation?
Hyperinflation commonly occurs when there is a significant rise in money supply that is not supported by economic growth. Simply put, it is caused by dramatically increasing the amount of money in an economy.
The increase in the money supply is often caused by the government printing more money into the domestic economy. As there is more money in circulation, prices rise.
What are the effects of hyperinflation?
Hyperinflation quickly devalues the local currency as the prices of goods and services rise in conjunction with the increase in the money supply.
Such a situation, in effect, often causes the holder of the local currency to minimize their holdings and switch to more stable foreign currencies.
In an attempt to avoid paying for higher prices tomorrow due to hyperinflation, individuals typically begin hoarding durable goods such as equipment, machinery, jewelry, etc.
In situations of prolonged hyperinflation, individuals will begin to hoard perishable goods.
However, that practice causes a vicious cycle.
As prices rise, people hoard more goods, in turn, creating a higher demand for goods and further increasing prices.
If hyperinflation continues unabated, it nearly always eventually causes a major economic collapse.
Severe hyperinflation can cause the domestic economy to switch to a barter economy, with significant repercussions on business confidence.
For example, with the unemployment rate exceeding 70%, economic activities in Zimbabwe shut down and turned the domestic economy into a barter economy.
It can also destroy the financial system as banks become unwilling to lend money.