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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
For more on inflation and its causes, subscribe to MoneyWeek magazine.
-
Tycoon Truong My Lan on death row over world’s biggest bank fraudProperty tycoon Truong My Lan has been found guilty of a corruption scandal that dwarfs Malaysia’s 1MDB fraud and Sam Bankman-Fried’s crypto scam
-
Why undersea cables are under threat – and how to protect themUndersea cables power the internet and are vital to modern economies. They are now vulnerable
-
What is a dividend yield?Videos Learn what a dividend yield is and what it can tell investors about a company's plans to return profits to its investors.
-
High earners to pay nearly £2000 more in tax due to fiscal dragVideos The government froze tax thresholds, which will drag employees into higher tax bands as wages rise with inflation. We explain what fiscal drag is, and how to avoid it.
-
What is a deficit?Videos When we talk about government spending and the public finances, we often hear the word ‘deficit’ being used. But what is a deficit, and why does it matter?
-
Too embarrassed to ask: what is moral hazard?Videos The term “moral hazard” comes from the insurance industry in the 18th century. But what does it mean today?
-
Too embarrassed to ask: what is contagion?Videos Most of us probably know what “contagion” is in a biological sense. But it also crops up in financial markets. Here's what it means.
-
Too embarrassed to ask: what is a marginal tax rate?Videos Your marginal tax rate is simply the tax rate you pay on each extra pound of income you earn. Here's how that works.
-
Too embarrassed to ask: what is stagflation?Videos Traditionally, economists and central bankers worry about inflation or recession. But there is one thing worse than both: stagflation. Here's what it is
-
Too embarrassed to ask: what is the metaverse?Videos The term “metaverse” sounds like something out of a science fiction novel (and it is). But what does it actually mean?
