Hyperinflation - what is it and why is it dangerous?

Hyperinflation is easier to prevent than to stop. For the country, this is the collapse of the monetary and financial system, which leads to the destruction of commodity-money and credit relations, the loss of confidence in the national currency. What is hyperinflation and what causes it? Let's discuss in the article the essence of the economic phenomenon.

What is hyperinflation

Hyperinflation is an excessive and uncontrolled rise in prices by dozens or more times, which for the state is associated with an economic crisis and a total depreciation of the national currency.

Examples of hyperinflation in history

Throughout the modern history of hyperinflation, the economies of countries have been:
Germany in the 20s of the twentieth century - the rapid rise in prices and inflation reached 3.25 million% after the First World War.
China - the country experienced hyperinflation from 1937 to 1949, the peak was reached in April 1949, the monthly price increase was 5,070%.
After World War II, inflation and price growth reached 5,300% in Japan, 41.9 quadrillion% in Hungary, and 8.55 billion in Greece.
Brazil - price increases and inflation reached 300% in 1970 and 2,000% in 1985.
Argentina - In December 1989, prices rose by 4,923%.
Russia - in 1993-1994, price growth and inflation reached 2.4 million%. At the same time, the national currencies of Ukraine, Georgia and other post-Soviet countries weakened.
Zimbabwe - the rise in prices and inflation reached 231 million% in 2008.

Let us consider what causal relationships precede hyperinflation and how they manifest themselves in the economies of countries.

Causes

The factors that lead to the depreciation of the national currency and the rapid rise in prices are:

• an excess of money in circulation;
• mistakes in establishing economic and political ties;
• violation of the functioning of the commodity-money system;
• budget deficit;
• lack of goods on the market;
• lack of a well-thought-out competent program on the part of the government to overcome the crisis;
• unjustified emission (issue of new money), which leads to an interrupted cycle of devaluation of the national currency.

Criteria for evaluating the signs of hyperinflation may differ in different economic sources, but they all boil down to three key points:

• monthly price growth exceeds 50%;
• annual progressive price growth exceeds 900%;
• price growth over several years over 2% per month.

If in a country the price of goods and services has jumped by more than one and a half times in a month, there is hyperinflation in the country.

Consequences

Hyperinflation affects all spheres of life of the country and the individual. Consequences:

• loss of confidence in the national currency;
• crisis of the banking and financial system;
• devaluation;
• mass bankruptcies of companies and industries;
• rising unemployment and impoverishment of the population;
• growth of social tension;
• reduction of tax revenues to the budget and reduction of social programs;
• progressive rise in prices;
• food shortages due to panic buying of goods;
• Wage growth has not kept pace with rising food prices.

Hyperinflation is a serious shock, if this list is added by a decrease in the investment attractiveness of the country, the lack of cash injections into the development of production, the presence of political problems, the threat of default, then the situation can lead to a long-term crisis.

Summing up

Hyperinflation is a catastrophe for the entire economic system of the country. Attempts to get out of the crisis by canceling the old and introducing a new national currency (nullification) or a policy of "crossing out zeros" (denomination) can help reduce the burden on the system as a whole, but will not solve the problem. To overcome the crisis, long-term solutions are needed, which include radical reforms in the system of monetary policy and the country's economy.

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Paul Roberts

Paul Roberts 51 years old Born in Edinburgh. Married. Studied at University of Oxford, Department of Public Policy and Social Work. Graduated in 1997. Works at Standard Life Aberdeen plc.

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