All economies experience some degree of inflation, which is when the average price of goods increases, the purchasing power of money decreases. Normally, governments and financial institutions work together to ensure that inflation occurs at a smooth and gradual pace. However, there are many instances throughout history where inflation accelerates to an unprecedented degree, causing the real value of the country's currency to depreciate at alarming proportions. This accelerated inflation is known as hyperinflation.

Economist Philip Cagan pointed out in his book "The Monetary Dynamics of Hyperinflation" that it begins when the price of goods and services rises by 50% in a month Hyperinflation. For example, if the price of a bag of rice rises from $10 to $15 in 30 days, and from $15 to $22.50 by the end of next month, hyperinflation has occurred. And if this trend continues, the price of a bag of rice could rise to $114 in six months and $1,000 in a year.

Hyperinflation rarely stays at 50%. In most cases, these inflation rates can rise so quickly that the prices of goods and services can rise dramatically within a day, or even a few hours. The rise in prices has reduced consumer confidence, leading to the country's currency depreciating. Eventually, hyperinflation will cause a chain reaction, leading to company closures, increased unemployment, reduced tax revenue, etc. The most "well-known" hyperinflation occurred in Germany, Venezuela, and Zimbabwe, but many countries have also experienced similar economic crises, such as Hungary, Yugoslavia, and Greece.

Hyperinflation in Germany

The most famous hyperinflation It takes place in Germany's Weimar Republic after World War I. At that time, Germany borrowed large amounts of money to finance the war, believing that they would win the war and eventually use the Allied reparations to repay these debts. But in the end, Germany not only failed to win the war, but was required to pay billions of dollars in reparations after its defeat.

The causes of hyperinflation in Germany are controversial. The most common theories are the suspension of the gold standard, war reparations, and the reckless issuance of banknotes. The decision to suspend the gold standard after the war meant that the amount of money in circulation had nothing to do with the value of gold owned by the country. This controversial move led to the devaluation of the German currency, which led to the Allies demanding that Germany pay reparations in currencies other than paper currency. Germany's response was to print a large amount of its own currency to purchase foreign currency, which led to further devaluation of the German mark.

At certain times during that period, inflation was typically increasing at a rate of more than 20% per day. Eventually, the German currency became so worthless that many German citizens began burning paper money to stay warm because it was cheaper than buying wood.

Hyperinflation in Venezuela

Due to huge oil storage, Venezuela maintained a healthy economy during the 20th century, but an oil glut in the 1980s, followed by economic mismanagement and corruption in the early 21st century, triggered a strong socioeconomic crisis. and political crisis. This crisis began in 2010 and is one of the worst yet.

Venezuela's inflation rate has risen rapidly, from 69% in 2014 to 181% in 2015. Hyperinflation began in 2016, with the inflation rate reaching 800% by the end of the year, 4,000% by 2017, and now reaching 2,600,000% at the beginning of 2019.

In 2018, President Nicolás Maduro announced that a new currency (the sovereign bolivar) would be issued to combat hyperinflation and replace the existing one at an exchange rate of 1/100,000 Bolivar. Therefore, 100,000 bolivars becomes 1 sovereign bolivar. However, the effectiveness of this approach is questionable. Economist Steve Hanke said that the approach of "eliminating minus zero" is a "superficial effort." If you want to solve the problem, you need to change economic policies, otherwise it will be meaningless.

Hyperinflation in Zimbabwe

Zimbabwe became independent in 1980. Its economy has remained stable since then. However, in 1991 the Mugabe government launched a program called ESAP (Economic Structural Adjustment Programme), which was ultimately considered to be the main cause of Zimbabwe's economic collapse. Along with ESAP, land reforms carried out by the authorities led to a sharp decline in food production, which in turn caused a huge financial and social crisis.

The Zimbabwe dollar (ZWN) began to experience instability in the late 1990s, and hyperinflation began in the early 2000s. The inflation rate for the whole year of 2004 was 624%, and by 2006 it was 1,730%. In July 2008, it reached 231,150,888%. Due to the lack of data provided by the central bank, the inflation rate after July is based on theoretical estimates.

According to calculations by Professor Steve H. Hanke, Zimbabwe's hyperinflation peaked in November 2008, with an annual inflation rate of 89.7% to the sixth power of one million , equivalent to 79.6 billion percent, or 98% every day.

Zimbabwe was the first country to experience hyperinflation in the 21st century, and that inflation was the second most severe in history (after Hungary). In 2008, the Zimbabwe dollar was officially abolished and foreign currencies were adopted as legal tender.

Uses of Cryptocurrencies

Since Bitcoin and other cryptocurrencies They are not based on a centralized system, so their value cannot be determined by governments or financial institutions. Blockchain technology ensures that the issuance of new currencies follows a fixed schedule and that each unit is independent and will not be repeated.

And that's why cryptocurrencies are growing in popularity, especially for countries like Venezuela that are experiencing hyperinflation. The same situation can be seen in Zimbabwe, where P2P payments in digital currencies have also shown significant growth.

In some countries, government authorities are seriously studying the possibility and risks of issuing government-backed cryptocurrencies as potential alternatives to traditional fiat currency systems. The Riksbank acted first. Other obvious examples include the central banks of countries such as Singapore, Canada, China and the United States.

Summary

Although instances of hyperinflation are few and far between More distantly, but it is clear that short-term political or social unrest is likely to cause a rapid devaluation of traditional currencies. Meanwhile, falling demand for the country's only export may also be a contributing factor. Once a currency depreciates, prices can quickly skyrocket, ultimately leading to a vicious cycle. Some governments are also trying to solve this problem by printing more currency, but the fact is that this strategy ultimately proves to be a useless move, but will further reduce the overall value of the currency. Interestingly, when trust in traditional currencies declines, trust in cryptocurrencies rises. This may have a significant impact on how currencies are viewed and treated around the world in the future.