What is Hyperinflation?
Hyperinflation refers to the destructive damage to the value of money. Sometimes, this damage is permanent. This damage to the value of money is so catastrophic that a book on Germany's hyperinflation during 1922-23 was titled, “When Money Dies.” During hyperinflation, prices of goods and services rise rapidly. In the most severe cases, prices could double in days or even hours. When prices increase at such a rapid pace, people desperately spend their money as soon as they receive it. Thus, the velocity at which money moves in the economy increases rapidly, fueling the price hikes. Hyperinflation is also known as "hypervelocity" due to this sensation.
Hyperinflation Explained
Hyperinflation is a rare circumstance because it requires a series of financial crises to go uncontrolled in a country. There are generally four stages that lead up to hyperinflation:
Phase 1: The country gets high levels of debt, which could be in foreign currency due to long-term trade deficits or funding wars.
Phase 2: A crisis, whether political, economic, or financial, severely damages the country's capability to produce goods and services. This results in a significant drop in government tax income, leading to a sharp increase in the fiscal deficit. i.e., the country's currency exchange rate starts to decline compared to other countries, and inflation begins to rise.
Phase 3: The economic crisis and widening fiscal deficit weaken confidence in the government, controlling it from borrowing from financial markets or its citizens. In response, the government resorts to "printing money" through the central bank to meet its financial obligations.
Phase 4: As the widespread money printing becomes evident, the last shreds of confidence in the government are cracked, causing the currency exchange rate to collapse, and hyperinflation takes hold.
It's important to differentiate between hyperinflation and high inflation, as high inflation can be handled through different financial policies, but hyperinflation is almost uncontrollable.
Although hyperinflation may seem alike stagflation, they are basically different economic phenomena. Stagflation is a rare and alarming economic phenomenon that mixes slow growth, high inflation, and high unemployment. On the other hand, hyperinflation not only demolishes a country's currency but sometimes its government as well. Stagflation makes people's lives challenging by scratching the value of money and restricting their ability to generate more wealth, while hyperinflation has more catastrophic consequences