Hyperinflation definition
/What is Hyperinflation?
Hyperinflation is an extremely rapid increase in prices. It typically occurs when the central government greatly expands the money supply or when there is a loss of confidence in the currency. This situation usually arises when a country undergoes an unusually stressful budgetary situation, such as a budget shortfall caused by a collapse in commodity prices. The government then chooses to print far too much money to overcome its financial shortfall, so that the supply of money greatly exceeds the demand for it.
When hyperinflation persists, the currency effectively becomes unusable, so that consumers must instead engage in barter transactions or the use of a foreign currency. Consumers are also more likely to avoid currency holdings, instead investing in hard assets. Doing so drives up the price of hard assets, since everyone is engaged in the same behavior.
Examples of Hyperinflation
There have been several recent cases of hyperinflation, including Hungary from 1945 to 1946, Yugoslavia from 1992 to 1994, and Zimbabwe in 2008. One case of it that had massive repercussions was in Germany from 1921 to 1923, which eventually led to the rise of Hitler in 1933.
How to Stop Hyperinflation
There are several techniques that can be used to stop hyperinflation, which include the following:
Stop printing money. Hyperinflation can be resolved by halting the printing of more money. Doing so prevents the further devaluation of the currency.
Issue a replacement currency. To restore the confidence of the public, it may be necessary to replace the existing currency. This could involve having the central bank issue entirely new banknotes, or the bank could peg the existing currency to a more stable foreign currency, such as the U.S. dollar. In some cases, countries suffering from hyperinflation have even abandoned their currencies and switched to using the U.S. dollar.
Replace the government. The preceding actions require the support of a government with a proper knowledge of economics. Since the current government presumably started the hyperinflation, it typically requires the replacement of that government with a new one in order to halt the hyperinflation.