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What is Hyperinflation?


The term 'Hyperinflation' is included in the Economics edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

In the field of economics, hyperinflation proves to be inflation, or rising prices over time, that is extremely high and even beyond controlling. This state of the economy exists as the overall levels of pricing in a certain country are rising sharply and quickly at the same time as the actual values of these economic goods remain roughly the same price as measured in other more stable currencies. In other words, the nation’s own currency is diminishing in value rapidly, commonly at rate that grows in pace.

The IASB, or International Accounting Standards Board, gives a precise definition of hyperinflation. They state that when the rate of inflation during three cumulative years nears one hundred percent total, or at least twenty-six percent each year compounded annually for three consecutive years, then hyperinflation has been reached. Other economists such as Cagan have declared hyperinflation to be when inflation is greater than fifty percent each month. Hyperinflation can witness the overall price levels go up by five to ten percent and higher even in single days for extended periods of time. This stands in sharp contrast to regular inflation which is commonly only reported over a quarterly or annual basis.

As greater and greater amounts of inflation are created in each printing of money instance, a truly vicious cycle takes effect. Such hyperinflation is clearly evident as the money supply grows at an uninterrupted rate. It is typically seen alongside the population’s unwillingness to keep the hyper-inflationary currency for any longer than they have to in order to use it for any hard good that will prevent them from losing more actual purchasing power. Hyperinflation is typically a part of wars and their after effects, social or political upheavals, and currency meltdowns such as seen in Zimbabwe.

Hyperinflation is a phenomenon that is unique to fiat currencies that are not backed up by anything but a government’s faith and trust. As the money supply is not limited by normal restraints like gold in a vault, it is instead run by a paper money standard. The supply of it is completely dependent on the discretion of the government.

Hyperinflation commonly leads to intense and long lasting economic depressions. This is not always the case though. In Brazil which suffered in the grips of hyperinflation for thirty years in the 1964 to 1994 period, the government managed to avoid economic collapse by valuing all non-monetary goods, services, and investments for the whole economy in an involved index. The government supplied this daily updated index that they measured with the daily Brazilian currency against the United States dollar.

In contrast to Brazil, Zimbabwe did not bother to set up such an index measured against the dollar. They did offer the day by day changes in the U.S. dollar as a comparison for everyone in the country to see. This voluntary comparison only served to worsen the problem and finally destroyed the real value of non monetary items that did not get updated as expressed against the Zimbabwe dollar. All monetary items in the country finally lost every bit of value during the hyper-inflationary meltdown.

The term 'Hyperinflation' is included in the Economics edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.