Hyperinflation is a phenomenon in which the average price of goods and services increases rapidly, causing a loss of value. It is typically seen in countries with unstable monetary policies.
Hyperinflation occurs if inflation is not controlled. One standard definition of hyperinflation is when inflation is more than 50 percent per month. In some extreme cases, hyperinflation can be so intense that prices double within days. It is also known as Runaway inflation (as it is set loose and run away madly).
Once it starts, it tends to spiral even further out of control. If inflation is a general price increase, hyperinflation is an excessive, out-of-control increase in available prices. For example, your weekly food basket that costs Rs 1,000 would suddenly cost Rs 2,000 the next week, then Rs 4,000 the week after, and so on.
Hyperinflation is detrimental because if wages don’t rise proportionately to general prices, people can no longer afford to buy essential items, meaning the standard of living falls. It also weakens tax revenues, causes businesses to fail, raises unemployment, and drives the cost of living so high that political instability quickly follows.
Hyperinflation can happen in any economy, although fewer developed economies have been affected.
Examples of Hyperinflation
The most famous example came when, after World War One, Germany was left with high debts. So the government printed more of its currency to pay them off. But the money lost its value, and inflation reached 29,500% a month in October 1923. Eventually, the government had to introduce a new currency to get prices under control.
In Zimbabwe, inflation peaked in 2008, which meant the government had to abandon the Zimbabwean dollar. It announced the return to a national currency last June.
Venezuela has also seen skyrocketing inflation.
Runaway inflation continues to affect countries even today.
Causes of Hyperinflation
The main reasons for hyperinflation are: –
- Increase in the money supply and
- Demand-pull inflation.
- Cost-Push Inflation.
The first type happens when a country’s government begins printing money to pay for its spending. As it increases the money supply, prices rise as in regular inflation.
The second one, i.e., demand-pull inflation, occurs when a surge in demand outstrips supply, sending prices higher. This can happen due to increased consumer spending due to a growing economy, a sudden rise in exports, or more government spending.
The third type of hyperinflation occurs when the cost of essential goods and services rises rapidly because the country needs to import them and has insufficient monetary resources. Such hyperinflation occurs in countries dependent on few sources of revenue and has experienced losses in their financial projects based on foreign funding. We have seen this recently in Sri Lanka in 2022.
What are the Effects of Hyperinflation on the Economy, Investment & Personal Finances?
Hyperinflation is when the cost of living increases much faster than the inflation rate. With this, people are forced to spend more and more of their money on necessities.
Hyperinflation can lead to a loss in personal wealth and investment. This is because prices will rise faster than wages, meaning people will not be able to afford these goods. This causes a lot of financial instability in the economy, as well as an increase in debt for consumers and businesses.
Hyperinflation has been seen in countries such as Venezuela, Zimbabwe, Sri Lanka, and many other developing countries. The hyperinflation situation could also be caused by political instability, such as Argentina’s 2001 crisis, Russia’s 1998 crisis which brought down the ruble in 1998, and recently, as seen in Sri Lanka in 2022, where hyperinflation occurred due to an external Loan crisis.
What are the Effects of Hyperinflation on Credit Markets?
The effects of hyperinflation on credit markets are complex and difficult to predict. However, some factors could lead to an increase in default rates and an increase in interest rates, as well as a decrease in credit availability.
Hyperinflation can lead to banks becoming insolvent, which will cause them to be unable to lend or provide loans. This will lead to a decrease in credit availability, which will cause interest rates and default rates to rise.
Hyperinflation disrupts the credit market because it creates an environment of fear in which people are reluctant to make sizeable investments.
Essential Tips for Safeguarding Your Investments
With hyperinflation seen in many countries, there is a need for people to be prepared. Here are a few tips to safeguard your investments during hyperinflationary periods.
- Invest in a diversified portfolio with high liquidity.
- Keep your assets in gold and silver coins.
- Invest in real estate.
- Avoid debt instruments such as credit cards and mortgages.
- Make sure you have an emergency fund.
- Keep liquid assets on hand for emergencies.
Conclusion: Hyperinflation’s Impacts on Your Investments and Your Wealth
Investors need to be aware and prepared as the world continues to experience unprecedented levels of inflation.
The impacts of hyperinflation on your wealth and investments can be devastating. However, it would help if you had a strategy in place before it happens.
To prepare for hyperinflation, it is essential to understand what it is and how it works. This means understanding the different kinds of financial investments that exist in the world, how they are impacted by inflation, and what types of investments you should make so that they can protect during hyperinflation.