Uncommon but hugely damaging, hyperinflation can destroy economies. Here’s everything you need to know…
Hyperinflation is, thankfully, a rare occurrence. But given that the inflation rate in this country has been hovering around 9% as of May 2022, this article feels especially relevant.
While this number might look scary – and will have its fair share of consequences across the nation – it’s also, you’ll be happy to hear, a whole different ballgame compared to hyperinflation.
So, what do we mean by hyperinflation? Mentions in your high school textbooks aside, it might not be a term you’re familiar with. If that’s the case, we’re here to help.
Below, we’ll look at hyperinflation in more detail, so you can get up to speed on what it means, what causes it, and how you can protect against it should it arise in the future.
What does hyperinflation mean?
Hyperinflation is the term used to describe rapid, excessive, and out-of-control general price increases in an economy. In periods of hyperinflation, these prices rise to more than 50% per month. Hikes like this mean that something as everyday as a loaf of bread or a cup of coffee might cost a certain amount in the morning and a higher amount later in the day.
Like we said up top, hyperinflation is a rare occurrence, particularly in developed economies. That said, it has occurred many times throughout history, including in China, Germany, Russia, Hungary, and Argentina.
What is the difference between inflation and hyperinflation?
So, how does this differ from regular inflation? Inflation is a sustained price increase in goods and services that’s caused by an increase in money supply by a government. Inflation can also happen as a result of periods of economic growth that create more demand for skilled employees and resources. This creates higher salaries, which in turn creates higher prices.
For the most part, a certain amount of inflation is a good thing for the economy. As prices go up, consumers have more of an incentive to spend their money. The spiraling prices of hyperinflation, on the other hand, can wreak havoc on an economy, causing everyday essentials like food and fuel to become scarce, and incomes to drop, as a result.
Once hyperinflation is underway, correcting it becomes an uphill battle. Reducing government spending is a common approach, but the drastic cuts to social spending, military spending, and subsidies come at a price. Slashing the money supply can also help, although this causes interest rates to soar. Anyone in the market for a new house or vehicle is going to struggle in this scenario.
In extreme circumstances, other countries have resorted to replacing their currency with a more stable foreign currency. In 2000, Ecuador replaced its currency, the sucre, with the US dollar, while in 1991, Argentina created a new version of its currency tied to the US dollar, which helped to ease hyperinflation greatly.
What causes hyperinflation?
There are two reasons why hyperinflation can happen.
The first is a rapid increase in a country’s money supply, usually when a government prints more and more money. While this might sound like a good thing, there’s a reason for the upswing in money printing: to pay for its excessive spending. As the amount of money increases, the value of each individual unit of currency drops, and prices rise.
The second cause, demand-pull inflation, takes place when a surge in demand outstrips supply, causing prices to skyrocket. This happens due to increased consumer spending due to a growing economy, abrupt rises in exports, or increases in government spending.
What happens when there is hyperinflation?
Across individuals and economies, the effects of hyperinflation can be disastrous.
With people rushing to avoid paying more for goods, hoarding becomes commonplace. What might start with durable goods soon leads to perishable goods like bread and milk. As these everyday goods become scarcer and more expensive, people are unable to pay for even the most basic of necessities.
As money loses its value, savings become worthless. This means that the elderly are often hit the hardest during periods of hyperinflation. Likewise, with loans losing value and people halting their deposits, banks and lenders soon go bankrupt.
Hyperinflation also causes the value of the currency in foreign exchange markets to come crashing down. With the cost of foreign goods at all-time highs, importers go out of business. With the loss of so many jobs and the bankrupting of so many businesses, unemployment increases as a result. Meanwhile, government tax revenues fall, struggling to pay for what were once basic services.
There are small, specific positives to hyperinflation, however. Those who took out loans will benefit; their debt will be next to worthless until it’s all but wiped out. The falling value of local currency also makes exports far cheaper than foreign competitors. Exporters receive hard foreign currency too, which increases in value against the falling local currency.
All told, however, the fallout of hyperinflation can cause nations to fall into extreme recessions and even depressions.
How to protect your finances against hyperinflation
We’ve spoken about protecting from inflation before, but clearly, hyperinflation is an entirely different beast.
To protect your finances against hyperinflation, it’s well worth keeping an eye on your personal balance sheet and budget. Both inflation and hyperinflation can turn your savings to dust. To stay ahead of rising or out-of-control inflation, people have used some of their savings to pay off debt, cutting off rising interest rates at the pass so they have less debt service to deal with during periods of rising inflation.
Making some changes to your budget can also help with weathering any potential storms. If there are areas where you can minimize your spending and create larger cash flow, it may be possible to combat the increase in the cost of goods.
Even a few small changes, such as quitting your gym membership, eating out less, carpooling to work, or downsizing that gas guzzler, can make all the difference.
At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto, and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk-free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.
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