Inflation is a common environment for most economies as prices tend to rise as time passes. Governments and central banks around the world mold policies in an effort to curtail inflation and keep it under control. Another less common phenomenon is deflation, or the general decline in prices (and wages) and inflation rates fall below zero. Still an even more rare event is hyperinflation, an issue that does not ail nations often, but when it does, it leaves behind significant damage. For those unfamiliar with hyperinflation and its impact on a surrounding economy, we outline five surprising facts about the phenomenon [see also Doomsday Special: 7 Hard Asset Investments You Can Hold in Your Hand].
- Results from large increase in money supply: Most often, hyperinflation is a direct result of a large increase in the money supply of a particular nation. When a bank begins to print money, the currency quickly becomes devalued, leading to a deadly spiral in which more money is require to fund government activities (sound familiar?). This leads to an increase in prices around said nation that only continues to accelerate. Though there is no specific benchmark for hyperinflation, many economists feel that it can be described by monthly inflation of more than 50%. At those rates, a $10 CD today would cost you around $1,300 in just one year.
- Lack of confidence in currency: Working off of the last point, hyperinflation is also caused by a general lack of confidence in a particular currency (this one sounds familiar too). When consumers do not trust a currency it can quickly lose its value, especially as investors look elsewhere to store their capital. Note that this process only works in fiat currencies, as printing money at will (only a possibility of paper money) causes people to rightly question the value of said currency. Though the U.S. has long been off of the gold standard, many analysts and investors are calling for a return to a backed currency given the risks associated with paper money and the Fed’s ability and willingness to print dollars at will [see also Commodity Plays For the End of Fiat Currency].
- More closely linked to deflation than inflation: This is one of the more surprising facts that investors learn about hyperinflation. Common sense would tell you that the name “hyperinflation” simply suggests a very extreme case of inflation. While this is technically true, hyperinflation is more closely related to deflation, as many view it “as the result of a failed attempt at printing money to avoid the deflation that would be caused by austerity” writes Max Nisen.
- Hyperinflation still occurs today: Many of the examples of hyperinflation date back to the early 20th century or in post-WWII period, so many associate this phenomenon with history. Unfortunately, hyperinflation is still a very real threat to some countries and currently afflicts economies around the world, with the chief example being Zimbabwe. Following a civil war and major confiscation of farmland in the mid to late 2000s, this nation endured (and is still enduring) unfathomable hyperinflation with its peak annual inflation rate clocking in at 6.5 quindecillion novemdecillion percent. For those of you keeping score at home, that is the number 65 followed by 107 zeros. “To get a handle on it, realize that it’s equivalent to inflation of 98% a day. Prices double every 24.7 hours. Shops have simply stopped accepting Zimbabwean dollars” writes Steve H. Hanke. The nation has since abandoned its previous currency as it was deemed entirely irrelevant [for more commodity news subscribe to our free newsletter].
- The U.S. is currently the largest hyperinflation risk: If you did not already pick up on the hints above, the U.S. has been exhibiting early habits of countries that fall into hyperinflation for quite some time now. Though the risk of this actually coming to fruition is very small, UBS recently stated that “A significant deterioration of the fiscal situation or a significant expansion of the monetary policy stance in the large-deficit countries could lead us to increase the probability we assign to the risk of hyperinflation”. It’s probably something that we will never have to deal with, but it should be noted that the our nation is currently at risk for future hyperinflation.
Disclosure: No positions at time of writing.