(Hyper)Inflation
I recall being surprised when first studying the aftermath of the first worldwide war and the crisis of hyper-inflation in the Weimar Republic that ensued. This included stories many have by now heard - heaped wheelbarrows full of money to buy just loaves of bread.
So what is inflation?
Inflation is thought of by many people as being normal and doesn't itself create much alarm because of this. Central banks even admit that they target an annual inflation rate of around 2-3% as an economic goal. Such is the normality of inflation in the mind's of people that it can be openly admitted that theft is happening.
By increasing the amount of money in circulation, the central bank is reducing the purchasing power of all the existing units of money. Each unit that already exists loses purchasing power because more of it is now competing for the same number of goods, products, services etc.
This leads to the familiar increase in prices of goods and services over time. CPI - consumer price index and similar indices measure the effect of monetary policies affecting inflation that the central bank says they try to control.
In addition to increasing prices for the same good or service - inflation is often attempted to be hidden by charging the same amount for less goods or quality of goods. Less toilet paper sheets and smaller loaves of bread for example.
Unfortunately inflation is nowadays considered normal - it doesn't have to be by the way - it is accepted because it has become the norm through time and conditioning. Not because it is moral or proper.
Leaving that aside for now, let us come to hyperinflation - a topic that will become more debated as the effects of the trillions of dollars that are going to become more manifest in economies throughout the world. I don't think anyone would have expected at the turn of the millennium that the world's reserve currency - the US dollar or Federal Reserve Note more accurately - would be at the precipice of an event that has been studied many times.
Weimar is probably the most well known. Zimbabwe and it's trillion dollar notes is more recent but there are countless examples in the last century and prior. The most interesting of past events I think is John Law in Louisiana.
So what is hyperinflation exactly?
I have thought about it at length and believe it is best defined as:
"The process by which there is reducing and then ultimately no bid on the currency"
If you consider that any good or thing could be chosen as the medium of exchange for an economy. It could be paper notes or clam shells - the medium itself doesn't matter as much as the confidence in that medium or currency. Like an electrical current or a water current - the chosen thing acts as the medium by which value flows from one person to another.
When people or entities transact - they make bids on things and the opposite party makes an offer - and if a price can be discovered that makes each party equally happy (or unhappy) then a transaction takes place.
In hyperinflation - the medium of currency - becomes so devalued (devoid of value) that no one wants it. No one offers their goods for it because it is seen for what it is - just paper or plastic. Why would anyone make a bid on low value paper with their valuable loaf of bread?
The observant reader will notice that a loaf of bread has been mentioned twice already - and that is where hyperinflation hits - not in the price of luxury goods or those things that are not essential for survival.
It's important to remember that societies are coherent and ordered as long as everyone can be sure of their next three meals or so. When that is at risk - then chaos is around the corner so to speak. It's not when they are considering buying a supercar or a new phone.
Hyperinflation is a phenomenon of troubled and lean times - the countries or places it occurs are in trouble where the people are no longer concerned about the latest and greatest phone or tablet. They are concerned about their next meal and no one is assured of being able to secure it.
As the economy collapses at the top - with all the illusions of wealth crumbling away in front of people's eyes - and money is poured in by central banks trying to pay the usury (however small the amount - a small percentage of a large number is still a large number) then the purchasing power of the notes becomes increasingly worthless.
Hyperinflation manifests then in the increasing prices of essential items which everyone needs.
Why this is so is obvious to me at least.
When the supply of the essential things diminishes in the battered economy (recall that hyperinflation is a phenomenon of troubled times - not a booming economy) then everyone - from the bankers to the disenfranchised are all competing for the same remaining essential items in the economy. Food is the primary good that everyone needs.
That is where hyperinflation will become manifest and be observed by participants first. The price for food goes up exponentially since the supply of currency is similarly going up exponentially.
In "normal" times people willingly make bids on currency by exchanging their goods and services for it. Hyperinflation is then just the process by which the bids on inherently worthless currency with real valuable things extinguishes.
