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Hyperinflation

Suppose you’ve known a certain friend since childhood. He’s a nice guy, but he’s a liar and also a mooch. There’s basically no other way to state it. You look back through the years and remember the times he was going to go to the store with his parents, and agreed to take your money to get you treats. However, you observed when he showed you the candy it didn’t seem to be the right amount for the allowance money you gave him. As you grew up, it was always the same. Every time he was in charge of the money, it usually appeared to end up a little short.

Money is just the same as that friend. It is a liar. It says to you each day. “I’ll safeguard the value of the things that you’ve worked hard to get, trust me!”, but each and every single day, the value you will get out of it is smaller than it was the day before. Economists refer to this as “inflation”, and it’s an inseparable byproduct of our current money and credit system.

Hyperinflation comes about when individuals quit trusting their buddy, money, when it tells them, “I’ll safeguard the value of what you’ve worked hard for, trust me!”, This specific decrease in trust is sometimes unexpected, triggering a full currency failure, or it can occur in stages, with inflation heating up into hyperinflation. Either way, when that confidence breaks, things can get extremely bad for the country experiencing it.

We all use currency for two main reasons, because it’s useful, and because the government requires that we must accept it for repayment of debts. Which means your employer satisfies her debt for your work through paying in US dollars. If inflation has become bad, and you really don’t wish to keep those dollars because they are losing their value too quickly, you must trade those dollars to some other person or company for something else that’s keeping it’s value better, irrespective of whether it’s gold, food, or clothes.

The issue with this scenario is that no one else will want that money either.

Which means that you’ll have to provide a lot more of it than you previously would have in order to convince them to accept it. All of a sudden, that coat retailer isn’t going to be willing to sell a coat to you for only $200, they’ll want $1,000 for fear that they won’t be able to pass the money along again before it loses its worth. This is actually the catalyst that turns regular high inflation directly into hyperinflation.

Paradoxically, during hyperinflation, there’s usually a problem of not enough money. Prices rapidly overtake the consumer’s capability acquire money, and the entire economy comes grinding to a total stand still because of it. In order to combat this, nearly all governments facing such a crisis will start to revalue their currency. So suddenly, your $100 in the bank is revalued into $1,000, and you may now go out and buy that coat.

Except for the near certainty that the coat seller is in no way stupid, and is now charging $10,000 for that coat.

Wash, rinse, and repeat, and soon you’ll see your very first $1,000,000,000,000 note.

So what’s really taking place here?

Hyperinflation is, at its core, the market’s means of stating that the economy is going to go through a tremendous correction, no matter what. It’s normally a scenario in which a government tries to counter a depression by overstimulating its money supply until it ends up with a currency collapse. But the windup to that collapse can often take years, and the depressive effects are frequently invisible until after the start of the hyperinflation.

In the example above, for instance, the real deciding factor might have been that the other countries in the world had previously taken credit from that coat seller (and lots of additional nearby dealers) for many years, but had suddenly made a decision that they represented a bad credit risk, and demanded that they pay their bills in full before shipping any further. Supply in the questionable country seized up, and the government started injecting enormous degrees of liquidity so as to restart the local markets. However the only thing that would likely do would be to drive that extra money into chasing the remaining goods and services, and would have almost no immediate impact on improving the local manufacture of more.

Hence the currency undergoes a crisis of confidence, and hyperinflation takes hold until the imbalance which prompted it stabilizes.

But that aforementioned credit problem wouldn’t be anything at all like our current situation, would it?

I personally invite you to come over to my blog, RustysMetals.com, or check out my online Precious Metals Store, The $300 Trillion Dollar Crisis.

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