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Tuesday, September 7, 2021

Hyperinflation! (Primer)

Hyperinflation is a phenomenon that has caused a significant amount of hyperventilation within economic and market commentary. The pictures of people using wheelbarrows of money to go shopping are certainly memorable.

NOTE: This is an unedited draft of a section that will make its way into my inflation primer. I have kept this section minimal, but may add more later during editing.

However, hyperinflation fears have been used as a recruiting pitch by fans of hard money for a long time, and the threat of hyperinflation in the developed countries has been discussed far more than there are examples to point to. As an example, when I first launched my website in 2013, one of my earliest discussions involved a commenters’ theories about hyperinflation. This person had developed a model that showed that the United States and/or Japan were a matter of months away from a hyperinflation. After a decade has passed without said hyperinflation(s), I think it is safe to say that model was slightly off.

The loopy discussions of hyperinflation in commentary explains why I inserted it into the chapter on myths and misunderstandings. Hyperinflation is not a myth, but it is widely misunderstood.


In popular commentary, “hyperinflation” can mean “the inflation rate seems to be high,” which is not particularly rigorous. From the perspective of many people, an annual inflation rate of 20% would be an unprecedented economic disaster and might be referred to as a “hyperinflation.” However, such an inflation rate would be well above recent experience in developed countries, but it is not that uncommon across a wider range of times and countries. A hyperinflation is much more severe.

The formal definition for a hyperinflation used in economics is that the inflation rate hitting 50% monthly. If a 50% monthly inflation rate was sustained for a year, it would result in (roughly) a 13,000% inflation rate. This is such a high rate of inflation that we typically need to look at daily inflation rates.

Steve Hanke and Nicholas Krus created a list of hyperinflations that could verified that was published in The Handbook of Major Events in Economic History in 2013. In that original list, they identified 56 hyperinflations (with Venezuela entering an amended list in 2016).

Calculating the inflation rate during a hyperinflation is not straightforward. The techniques used by the national statistical agencies would not be adequate, since it would be nearly impossible to ensure that all measurements happened at exactly the same time of day. Instead, the inflation rate has to be inferred from things like currency quotes. That is, if the currency falls by 4% versus a “hard” currency on the day in the foreign exchange market, that is assumed to match a 4% daily inflation rate.

Using the Hanke-Krus list. the Weimar Republic (Germany) hyperinflation of 1922-3 had a peak monthly inflation rate of 29,500% (20.9% daily) in October 1923. This puts it in fifth place for the peak inflation rate. The well-known Zimbabwe hyperinflation of 2007-8 had a daily inflation rate of 98%. However, that only puts it into second place – Hungary in 1945-6 had a daily inflation rate of 207%. (One needs to use scientific notation to express the monthly inflation rates.)

Why Do Hyperinflations Happen?

My objective in this book is to avoid injecting too much of my opinions or disputed theory. Furthermore, although I have looked at the academic literature on hyperinflations as well as the histories of the Weimar hyperinflation, I cannot claim to have spent much time worrying about the subject. Nevertheless, one thing is safe to say: it is much harder to generate a hyperinflation in a developed economy than suggested by popular commentary.

In popular (and some serious) commentary, hyperinflation is the result of “printing money.” The argument of critics is that this ignores the other conditions that were in place.

In the textbook Macroeconomics, the authors discuss the hyperinflations in the Weimar Republic and Zimbabwe in section 21.3. They argue that the productive side of the economy was impaired (what is called the real economy).

  •  In the case of Weimar, Germany was locked into making reparations in gold as a result of the Treaty of Versailles. The Germans were unable to meet the stringent terms, and the French and Belgian armies occupied the industrial heartland of the Ruhr. This meant that Germany was unable to meet domestic demand from local production, yet the government attempted to keep spending in the local currency.

  • In Zimbabwe, land reforms resulted in about 45% of the local industrial farming capacity being destroyed. Furthermore, the National Railways of Zimbabwe was degraded, and there was a 57% decline in export mineral shipments. This  meant that attempts by the government to keep spending was met by an inability of the domestic private sector to supply output, and the collapse in exports meant that imports could not be financed.

If we look at the exceedingly numerous wildly incorrect hyperinflation predictions made by commentators, the common thread is that all of them focussed on changes in the money supply and had no mechanism explaining how real production would be impaired.

The Mechanical Difficulties with Starting a Hyperinflation

Under the current institutional arrangements in the developed economies, starting a hyperinflation faces some mechanical problems. Workers’ income taxes are generally levied as a percentage of income and withheld from paycheques. Additionally, value-added taxes (VAT) are levied as a percentage of sales. (The United States is somewhat of an exception with an absence of a VAT, although there are state-level sales taxes.)

Any immediate jump in nominal incomes and/or spending will cause an immediate corresponding rise in tax revenues. Meanwhile, governmental budgeting is done a year in advance, and nominal spending amounts are typically fixed. Such a hypothetical jump in rising prices and wages would cause an immediate budget surplus – which would have the effect of crushing the private sector, ending whatever imbalance caused the hypothetical hyperinflation.

Even if spending is indexed, indexation is typically done on an annual basis. This is way too slow for a hyperinflation, which needs prices to rise by 50% a month.

It is certainly possible that a developed country can have a currency collapse, a shortage of key consumption items (notably energy), or a tendency for accelerating inflation (like the 1970s). However, that is not going to be enough to generate a true hyperinflation. Instead, we need a fundamental change in practices. The country needs to essentially shift to having local prices indexed to prices in a “hard currency.” In this case, the domestic price level will then act as the inverse of the value of the currency. Which in turn implies domestic prices marching off to infinity if the price of the currency in the foreign exchange markets heads to zero.

Should I Worry About a Hyperinflation?

Historically, you only needed to worry about hyperinflation if you happened to be in one of the roughly sixty countries that got hit by them. If we look at popular commentary, there were far more concerns about hyperinflation than actual hyperinflations. That said, things can change.

It is not that hard to imagine bad economic developments. Many of which exhibit themselves as shortages of key items, resulting in price spikes. However, for a hyperinflation, you need to see a drift in institutional practices that would allow inflation to remain unchecked. Since I do not know in what country or year the reader is in, I cannot make any definitive statements.

References and Further Reading

  • Hanke, Steve H., and Nicholas Krus. “World hyperinflations.” The Handbook of Major Events in Economic History, Randall Parker and Robert Whaples, eds., Routledge Publishing, Summer (2013).

  • Macroeconomics, by William Mitchell, L. Randall Wray, and Martin Watts. Red Globe Press, 2019. ISBN: 978-1-137-61066-9

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(c) Brian Romanchuk 2021

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