In a time where inflation is a hot topic around the coffee bar, let’s take a deeper look at a hyperinflationary economy and the impacts that it can have.
With the United States economy currently on crutches and war in Ukraine with no current end in sight, inflation and recession have become a part of our everyday vocabulary. Now, there are thousands of different reasons for what has gotten us to this point, but today I don’t want to focus on the past, I want to focus on a hyperinflationary economy.
This exercise isn’t to scare anyone, but more to inform you on how bad things can get in an economy if certain guidelines aren’t followed and measures aren’t taken.
What exactly does that mean? What causes it? And how does it go away?
What is a Hyperinflationary Economy?
Let’s start by defining hyperinflation. The short answer is: a rapid and out-of-control price increase in an economy. The term inflation is used to measure the pace of rising prices for goods and services but turns into hyperinflation when that increase surpasses 50 percent per month.
The U.S. has recently gone through some very tough inflation, but we are still talking about single-digit increases at the moment. Third-world countries can often face a hyperinflationary economy, but it is rare for developed countries.
Please don’t read this and think that this is what’s next for the United States, but with everything happening, it is good to have a better understanding of the term hyperinflation. A hyperinflationary economy often comes in times of war and economic turmoil along with excess printing of money.
Why should the U.S. be cautious about creating a hyperinflationary economy? I repeat, I don’t necessarily see this happening, but the writing is certainly on the wall. The invasion of Ukraine by Russia has created a tilt in the supply-demand curve of natural gas and crude oil.
With gas prices up nearly 25 percent in the last six months, and even more over the last year, fuel prices have become a major concern for most American drivers. Not only has this war and other political decisions caused an increase in gas prices, but you are also set to see record grain prices with a likely shortage from Ukraine being unable to complete a normal farm season.
When you really sit and think about it, fuel and grain are the foundation of all products in the United States, and the ripple effect of incremental cost passed on to the consumer could be devastating. The tractor needs fuel to plant the seeds in the field. The forklifts need fuel to move items around the distribution centers. The semis need fuel to deliver the products to grocery stores. And last but not least, the consumer needs fuel to drive to the store and buy the product.
Some want to claim corporate greed on companies not willing to foot the bill of inflation, but no matter your thoughts, that’s just how a free trade economy works. If there was no money to be made, companies would stop producing the product which creates even bigger issues.
Remember, the U.S. has seen inflation of more than seven percent in 2022, but it’s still nowhere near what a hyperinflationary economy can bring. Since 2011, the average inflation rate has been right around two percent per year.
What Happens in a Hyperinflationary Economy?
Living in a hyperinflationary economy is next to impossible. Think about your groceries one month costing you $500, and the next month it goes to $750, and then just like that, the following month it’s over $1,100. Trust me, you aren’t getting a raise every month at work to cover this, so you start going without in certain areas to make sure you can survive.
Another major downside of a hyperinflationary economy is the hoarding of goods. Folks will start to buy as much as they possibly can, so they don’t have to continue paying the increased prices, especially on food. Then you start seeing food shortages. Some people will have enough to eat for two months, and others won’t have anything to eat for dinner.
Often, local citizens will also stop trusting the banking system in a hyperinflationary economy, which can lead to major issues. When the money stops going in and all the money comes out, banks will default on prior loan commitments and cause multiple lenders to go out of business.
Often times during hyperinflation, people will lose their entire savings as cash continues to lose value. The elderly become the most susceptible during hyperinflation as they often only have enough to live out their remaining years in a normal economy, and typically don’t have the ability to go back to work to generate additional income.
Then as the currency continues to plummet, the country no longer has the ability to import, and you start to see businesses close and go bankrupt. Following that, you start to see unemployment go crazy and you are left with a country of no one working and goods costing more than they ever have before.
Hyperinflation will often start from one set of circumstances and create a whole other set of problems before it is all said and done.
What Causes a Hyperinflationary Economy?
There are several major items that can cause or lead to a hyperinflationary economy, but one of the biggest is a war. Not only are there increased expenses for the countries fighting, but there is also a lot of instability and fear in the economy already, and likely supply chain disruptions.
A prime example right now is Russia and its ruble currency. When the invasion of Ukraine started, the United States and other countries started to put sanctions on the Russian government. That led to their currency being devalued even more, and a loss of confidence among Russian citizens and the rest of the world.
Once a currency starts being devalued, you start to see citizens hoard certain commodities (typically food). Once the supply chain is busted and some people are without, pricing can start to spiral. Governments will then try to print money to solve a problem, but they are truly just creating more issues as the increased money only creates more inflation on goods.
Another major issue is when there is too much money in the economy and the government continues to print. In the past, hyperinflation has occurred during severe economic turmoil and depression. Depression is a period of time in a country’s economy with the growth rate for total business is zero or even negative.
Economic growth is measured by gross domestic product (GDP), which can go negative for weeks or even months. But the side effects of a depression can last way longer with high unemployment, companies going out of business from lack of funds, and banks unwilling to give out money for investment opportunities.
To get an economy out of a recession, typically the government will attempt to increase the money supply to consumers. The additional income is to promote spending and investment. We saw this several times in 2020 and 2021 with stimulus payments from COVID19.
However, if too much money is given out and the GDP doesn’t see any growth, this can lead to hyperinflation, which can lead to the vicious cycle of consumers paying the higher prices for goods, thus driving the prices even higher and causing the banks to print even more money.
Example of Hyperinflationary Economy
I know I have referenced what’s happening in the U.S. right now with five to seven percent inflation rates to hyperinflation. And while I want everyone to be cognizant of what can happen, I want to give a past example of true hyperinflation to show just how bad things can get.
From 1993 to 1995, Yugoslavia went through one of the most severe cases of hyperinflation. The highest monthly inflation increase was 313,000,000 percent, and prices were doubled every 1.4 days.
Multiple currency adjustments, the collapse of the “dinar”, and government-set prices did nothing to help stop the craziness, and all but led to the demise of the country.
Not only was the Yugoslavian government corrupt, conflict in the country and a recession that started in the 1970s and continued all the way up to the collapse in 1993 all led to hyperinflation.
Price controls were put in place, but even the government didn’t follow practice and started to go overseas for purchases instead of buying artificially low prices that were set by the same government. The lack of buying swayed the supply/demand curve and then companies just stopped producing the goods and prices started to skyrocket.
As I mentioned at the beginning of this article, a hyperinflationary economy is an extreme state and is typically coupled with government corruption. Not saying the United States couldn’t go into a deep recession similar to 2008, but there are too many laws and checks and balances to allow severe hyperinflation to take over.
How to Get Rid of a Hyperinflationary Economy
For the last two countries that have experienced hyperinflation, it has caused their currency to destruct. The “dinar” in Yugoslavia was replaced with the German Deutsche Mark (DM), and in Zimbabwe, the former Zimbabwean dollar was replaced by the South African ran, Botswana pula, and the United States dollar.
Hyperinflation is so severe and so destructive that it’s nearly impossible to recover from. But there are a few items that can be done to help control inflation and keep things from getting out of hand.
In the United States, the Federal Reserve has most of the control over inflation with its monetary policies. When they see inflation starting to become a concern, they reduce the supply in the economy. The decreased availability of money will often lead people to save instead of spend, which will often slow down the economy and reduce inflation.
There aren’t many winners in a hyperinflationary economy, but there are typically two beneficiaries. The first are people who took out loans before the collapse. Typically, the debt ends up worthless and does not need to be paid back. The second is any company that can export. Not only does the currency devaluement make products cheaper, but they can also get paid in a foreign currency which is a huge boost in value.
The Federal Reserve will also use the interest rate to help keep an economy from facing too much inflation. If they raise rates, not only will it keep people from borrowing money for investment, but it will also encourage more money in savings accounts because of higher returns on money.
As I have mentioned above, what the Federal Reserve must be careful of is not breaking the supply chain by slowing down the economy and creating pure panic.
If we use the situation we are in right now, the economy is already in a fragile state. We are still in or just coming out of a worldwide pandemic that created supply chain issues for multiple industries. There is also a war happening overseas in Ukraine, with the threat of NATO countries eventually having to become involved.
The Federal Reserve must be delicate in every single move they make right now. And while the government can’t just keep printing money to solve the issues, they also can’t slow things down too much or they could create small pockets of hyperinflation.
The last way to stop hyperinflation, or any type of inflation, is to completely slash spending at the government level. This can have backlash, but it will not only slow down the economy, but will also make the citizens think before they spend.
I’m not here to argue right or wrong – I am the last thing from a politician – but think about how difficult of a situation it is right now for our own government. People are in need after a tough pandemic, but the government knows they must cut spending. Throw a country like Ukraine in there that needs us more than ever, and it’s a tall order to truly slow down spending at the government level.
The bottom line is that in order to stop something as severe as hyperinflation, the government has to be involved. And if you go back through history, most situations of a true hyperinflationary economy began with government corruption.