Hyperinflation

In 1956, Columbia University economics professor Phillip Cagan wrote The Monetary Dynamics of Hyperinflation, often regarded as the first serious study of hyperinflation and its effects (though The Economics of Inflation by C. Bresciani-Turroni on the German hyperinflation was published in Italian in 1931). In this work, Cagan defined a hyperinflationary episode as starting in the month that the monthly inflation rate exceeds 50%, and as ending when the monthly inflation rate drops below 50% and stays that way for at least a year. Economists usually follow Cagan's description that hyperinflation occurs when the monthly inflation rate exceeds 50% (accumulating to a yearly increase of 12,874.63%, or an increase by a factor of 129.7463).

The International Accounting Standards Board has issued guidance on accounting rules in a hyperinflationary environment. It does not establish an absolute rule on when hyperinflation arises, but instead lists factors that indicate the existence of hyperinflation:

While there can be a number of causes of moderate inflation, almost all hyperinflations have been caused by government budget deficits financed by currency creation. Peter Bernholz analysed 29 hyperinflations (following Cagan's definition) and concludes that at least 25 of them have been caused in this way. A necessary condition for hyperinflation is the use of paper money instead of gold or silver coins. Most hyperinflations in history, with some exceptions, such as the French hyperinflation of 1789–1796, occurred after the use of fiat currency became widespread in the late 19th century. The French hyperinflation took place after the introduction of a non-convertible paper currency, the assignat.

Monetarist theories hold that hyperinflation occurs when there is a continuing (and often accelerating) rapid increase in the amount of money that is not supported by a corresponding growth in the output of goods and services.

The increases in price that can result from rapid money creation can create a vicious circle, requiring ever growing amounts of new money creation to fund government deficits. Hence both monetary inflation and price inflation proceed at a rapid pace. Such rapidly increasing prices cause widespread unwillingness of the local population to hold the local currency as it rapidly loses its buying power. Instead, they quickly spend any money they receive, which increases the velocity of money flow; this in turn causes further acceleration in prices. This means that the increase in the price level is greater than that of the money supply.

This results in an imbalance between the supply and demand for the money (including currency and bank deposits), causing rapid inflation. Very high inflation rates can result in a loss of confidence in the currency, similar to a bank run. The excessive money supply growth can result from speculating by private borrowers, or may result from the government being either unable or unwilling to fully finance the government budget through taxation or borrowing. The government may instead finance a government deficit through the creation of money.

Governments have sometimes resorted to excessively loose monetary policy, as it allows a government to devalue its debts and reduce (or avoid) tax increases. Monetary inflation is effectively a flat tax on creditors that also redistributes proportionally to private debtors. …

Hyperinflation increases market prices, wipes out the purchasing power of private and public savings, distorts the economy in favor of the hoarding of real assets, causes the monetary base (whether specie or hard currency) to flee the country, and makes the afflicted area anathema to investment.

One of the most important characteristics of hyperinflation is the accelerating substitution of the inflating money by stable money—gold and silver in former times, then relatively stable foreign currencies after the breakdown of the gold or silver standards (Thiers' law). If inflation is high enough, government regulations like heavy penalties and fines, often combined with exchange controls, cannot prevent this currency substitution. As a consequence, the inflating currency is usually heavily undervalued compared to stable foreign money in terms of purchasing power parity. So, foreigners can live cheaply and buy at low prices in the countries hit by high inflation. It follows that governments that do not succeed in engineering a successful currency reform in time must finally legalize the stable foreign currencies (or, formerly, gold and silver) that threaten to fully substitute the inflating money. Otherwise, their tax revenues, including the inflation tax, will approach zero. The last episode of hyperinflation in which this process could be observed was in Zimbabwe in the first decade of the 21st century. In this case, the local money was mainly driven out by the US dollar and the South African rand.

Enactment of price controls to prevent discounting the value of paper money relative to gold, silver, hard currency, or other commodities fail to force acceptance of a paper money that lacks intrinsic value. If the entity responsible for printing a currency promotes excessive money printing, with other factors contributing a reinforcing effect, hyperinflation usually continues. Hyperinflation is generally associated with paper money, which can easily be used to increase the money supply: add more zeros to the plates and print or even stamp old notes with new numbers.

Much attention on hyperinflation centres on the effect on savers whose investments become worthless. Interest rate changes often cannot keep up with hyperinflation or even high inflation, certainly with contractually fixed interest rates. …

Since the late 2010s, inflation has been a constant problem for the economy of Argentina, with an annual rate of 25% in 2017, second only to Venezuela in South America and the highest in the G20. On 28 December, the Central Bank of Argentina together with the Treasury announced a change of the inflation target. The Central Bank attempted to reduce it to 15%, by adjusting its interest rates but these efforts only managed to stop further inflation rather than reduce it. An intense drought, ranking among the world's worst natural disasters in 2018, reduced the production of soy and dried up tax revenue.

Later in 2018, the Federal Reserve of the United States increased interest rates from 0.25% to 1.75% and then 2%. This caused investors to return to the United States, leaving emerging markets. The effect, a rise in the price of the United States dollar, was modest in most countries, but it was felt particularly strongly in Argentina, Brazil and Turkey. Despite the high-interest rates and IMF support, investors feared that the country might fall into a sovereign default once again, especially if another administration were to be voted in during the next election cycle, and started pulling out investments. All those factors led to a dramatic increase in the price of the US dollar in Argentina. The Central Bank increased the interest rate again, to 60%, but could not keep up.

Macri announced on 8 May 2018 that Argentina would seek a loan from the International Monetary Fund (IMF). The initial loan was $50 billion, and the country pledged to reduce inflation and public spending. Federico Sturzenegger, the president of the Central Bank of Argentina, resigned a week later, alongside much of its senior staff. Macri replaced him with Luis Caputo, and merged the ministries of treasury and finances into a single ministry, led by Nicolás Dujovne. The Turkish currency and debt crisis caused yet another increase on the price of the dollar. The tariffs on soy exports were restored, as a result of the crisis. Caputo resigned for personal reasons, and Guido Sandleris was appointed as president of the Central Bank. The IMF expanded the loan with an extra 7 billion U.S. dollars, the largest loan in IMF history. In exchange, the Central Bank would operate on the price of the dollar only when it surpassed certain requirements. …

Inflation rate is usually measured in percent per year. It can also be measured in percent per month or in price doubling time.

New price y years later = old price × ( 1 + inflation 100 ) y {\displaystyle {\hbox{New price }}y{\hbox{ years later}}={\hbox{old price}}\times \left(1+{\frac {\hbox{inflation}}{100}}\right)^{y}}

Monthly inflation = 100 × ( ( 1 + inflation 100 ) 1 12 − 1 ) {\displaystyle {\hbox{Monthly inflation}}=100\times \left(\left(1+{\frac {\hbox{inflation}}{100}}\right)^{\frac {1}{12}}-1\right)}

Price e-folding frequency = ln ⁡ ( 1 + inflation 100 ) {\displaystyle {\hbox{Price e-folding frequency}}=\ln \left(1+{\frac {\hbox{inflation}}{100}}\right)}

Price doubling time = 1 log 2 ⁡ ( 1 + inflation 100 ) {\displaystyle {\hbox{Price doubling time}}={\frac {1}{\log _{2}\left(1+{\frac {\hbox{inflation}}{100}}\right)}}}

Price e-folding time = 1 ln ⁡ ( 1 + inflation 100 ) {\displaystyle {\hbox{Price e-folding time}}={\frac {1}{\ln \left(1+{\frac {\hbox{inflation}}{100}}\right)}}}

Years per added zero of the price = 1 log 10 ⁡ ( 1 + inflation 100 ) {\displaystyle {\hbox{Years per added zero of the price}}={\frac {1}{\log _{10}\left(1+{\frac {\hbox{inflation}}{100}}\right)}}}

Often, at redenominations, three zeros are cut from the face values of denominations. It can be read from the table that if the (annual) inflation is for example 100%, it takes about 3.32 years for prices to increase by an order of magnitude (e.g., to produce one more zero on the price tags), or 9.97 years to produce three zeros. Thus, can one expect a redenomination to take place about ten years after the currency was introduced.