Definition
In economics, hyperinflation is very high and typically accelerating inflation. It quickly erodes the real value of the currency, as the prices of most or all goods increase. This causes people to minimize their holdings in that currency as they usually switch to more stable foreign currencies. Prices typically remain stable in terms of other currencies.
Hyperinflation
An out of control or extremely rapid inflation is known as hyperinflation. There is no definite numeric representation or definition of hyperinflation. Hyperinflation refers to the situation where the prices of commodities go so out of hand that the concept of inflation becomes essentially meaningless.
Hyperinflation results in an erosion of the real value of local currency and therefore, the population tends not to hold too much of the local money. The population, on the contrary, start holding foreign currency that is relatively stable than the local one. The official currency of a country loses its real value quickly, and the price level of economy goes up rapidly. In terms of foreign currency, the value of economic items remains relatively more stable.
Why does it occur?
One of the major causes of hyperinflation in any country is the deficit of the government that is continuously financed by increasing the amount of money. The government does not borrow or puts taxes on money, but rather just prints out vast amounts of money to meet the deficit. Hyperinflation is associated with social and political turmoil, wars, their aftermaths, and other crises, making it difficult for the government to put taxes on their population.
During the periods of depression, when there is a large influx of money, but it is not supported by a relative increase in the gross domestic product (GDP) of the country, hyperinflation is the usual effect. Since there is an evident imbalance of supply and demand in such an economy, the prices of commodities continue hiking unchecked, and the currency, hence, loses its value.
During the times of war, since there is a lack of confidence in the ability of a country’s currency for keeping its value intact, hyperinflation occurs. A risk premium is demanded by the sellers and thus the pries of the commodities rise, bringing down the value of the currency of the country.
Effects of Hyperinflation
Hyperinflation is related to the wiping out of the purchasing power of the local population, and the distortion of economy. The real assets are hoarded, and the currency is used to flee the country.
Remedy
Drastic measures need to be taken to end the eras of hyperinflation. One such measure is shock therapy which includes slashing the expenditure of the government and changing the currency basis. Foreign currency may also be used as the national currency under such circumstances.
Further Reading
- The realities of modern hyperinflation – mpra.ub.uni-muenchen.de [PDF]
- Indexation, inflationary finance, and hyperinflation: the 1945-1946 Hungarian experience – www.journals.uchicago.edu [PDF]
- The hyperinflation model of money demand revisited – www.jstor.org [PDF]
- Fiscal reforms and stabilisation: four hyperinflation cases examined – www.jstor.org [PDF]
- Budget deficits, stability, and the monetary dynamics of hyperinflation – www.jstor.org [PDF]
- Stock returns during the German hyperinflation – www.sciencedirect.com [PDF]
