What is Hyperinflation?


During a hyperinflation period in Argentina, when the currency was losing its value at an alarming rate, a popular joke was that it was cheaper to take a taxi than a bus because the bus ride was paid for at the beginning, when the currency was still worth something, while the taxi ride was paid for at the beginning, when the currency was still worth something, while the taxi ride was paid for at the end-after the currency had already lost its value.10,000 Argentina Banknotes with a value 10 Australs.

10,000 Argentina Banknotes with a value 10 Australs

Hyperinflation, an explosion in the prices of goods and services at rates exceeding 100 per cent, is a symptom of the economy out of control. Hyperinflation has occurred, at various times, all over the world: in Germany between the two world wars, in Israel, and in various parts of Eastern Europe-especially in the war-torn countries like Balkans. But hyperinflation has been most widespread in the debtor countries of Latin America, where it resulted primarily from government policies that attempted to satisfy political demands without looking economic consequences.

When a profligate government finances spending by increased borrowing abroad or by printing new currency, prices increase as the new funds enter the economy. The result is a vicious circle: the expectation of runaway inflation and the wage/price spiral takes on a life of its own. Prices rise quickly, leading to a demand for increased wages to pay for the increased prices, which leads to even higher prices.

Imagine buying goods for a home or a factory-or playing The Price is Right-when prices are increasing at the rate of 30 percent a month. Even winning the lottery may not help when a million-or a billion-pesos doesn’t even pay for next month’s rent. There were cases in hyperinflationary Germany after World War 1 when people had to use a wheelbarrow to bring enough to buy a day’s supply of food.

Hyperinflation’s radically rising prices often end up hurting poor people the most, because their day-to-day expenses consume a significantly higher percentage of their total income. Also, rich people have access to bank account that pay high rates of interest during time of hyperinflation while poor people rely on cash, which pays no interest, for their daily transaction. Some countries with high inflation therefore try to index all salaries and social service payments to the inflation rate. But this rarely keeps pace with real increase in prices, and purchasing power declines.
Hyperinflation also hurts on fixed incomes such as old-age pensions. During inflationary times, a nest egg-if not invested in something that tracks the rising cost of living-is soon worthless. Like when the Greece economy on the brink of collapse many people especially pensioner seen their savings decimated by hyperinflation
Governments often refused to take action against hyperinflation because they fear the political consequences of austerity plans or increased taxes. May overburdened government simply borrow-or- prints more money to keep from closing inefficient state industries or reducing bloated bureaucracies. These financial tricks will only work for a while, however, as the self-perpetuating spiral of wage and price increases spins out of control.

Just as a dying patient sometimes needs electroshock therapy to return to the land of the living, a hyperinflationary economy sometimes need an economic shock to bring it back to health. This shock can take many forms: some are political, some economic. In mid-1990s Brazil, for example, a new government took over during a particularly difficult period of hyperinflation. One of the first things the new president did was appoint a team of economist to come up with a plan to end the economic chaos ravaging the country. Their plano real called for a radical departure from the previous way of doing things, including, among other measures, opening up the country to imports and locking the currency into a quasi-fixed rate against the dollar. Consumers were shocked suddenly find cheaper alternatives to expensive local goods.

Expectations of rising prices fuels hyperinflation as much as rising prices themselves. Increased demand for wage increases puts pressure on companies to raise their prices. By coming up with an economic plan that convinces people that the storm is over, a government has already won half the battle in the fight against hyperinflation. And by ensuring that prices remain low-by allowing free imports from abroad, for example-the end of hyperinflation is assured.

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