Too embarrassed to ask: what is hyperinflation?

Mention hyperinflation and many of us will think of wheelbarrows full of cash in Weimar Germany. Or, more recently, Zimbabwe or Venezuela. But what exactly is hyperinflation and how does it come about?

The first thing to understand about hyperinflation is that it’s not just really, really high inflation. High inflation – in the sense of broadly rising prices for goods, services and wages – can certainly be very disruptive. For example, in the 1970s, at one point prices in the UK hit were rising by more than 20% a year. It’s a decade well known for civil unrest and financial turmoil.

However, hyperinflation is on an entirely different level. One technical definition of hyperinflation is when prices are rising at a rate of more than 50% a month. At that rate, prices will have risen by roughly 130 times by the end of the year.

As you can imagine, keeping track of price changes in that situation is virtually impossible. In short, what hyperinflation really represents is the point at which faith in a country’s currency and economy has been destroyed. The currency is effectively worthless.

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The most famous example is from the 1920s and Weimar Germany, with its images of people pushing wheelbarrows full of money. More recent examples include Zimbabwe in the late 2000s, and even more recently, Venezuela. How does this happen?

Hyperinflation is often associated with money-printing. However, it’s more accurate to say that money-printing can be a symptom of hyperinflation rather than the underlying cause.

There are several factors involved, but two stand out as crucial. One key factor is the destruction of a country’s ability to produce as many goods and services. For example, political corruption and mismanagement resulted in the collapse of both Zimbabwe’s farming industry and Venezuela’s oil industry. Weimar Germany, meanwhile, happened in the wake of the devastation of World War I.

Another key factor is that a country has high levels of debt or other obligations that need to be paid in a foreign currency. These debts are clearly unaffordable and yet the country cannot just print money to get rid of them. Instead, the value of the domestic currency collapses as the economy’s reduced productive capacity is channeled into paying these debts.

This is not to say that hyperinflation couldn’t happen in a developed economy like the UK or the US, who issue debt in their own currencies. But it would imply a devastating economic and civil collapse, rather than simply too much quantitative easing.

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