Hyperinflation and Crypto: A Remedy to Rapid Price Increase

Hyperinflation is an unlimited increase in the price of goods and services in an economy. It happens when resources, such as gas or food, are limited.

What is hyperinflation?

Hyperinflation is defined as an unlimited increase in the prices of goods and services in the economy. For an economy, unlike inflation, hyperinflation is a rare phenomenon. Nevertheless, it has occurred in various countries in the past, such as China, Germany, Zimbabwe and others.

What causes hyperinflation and how can it be prevented?

Hyperinflation is rapid inflation, in which prices can jump by 50% or more in a month. It is also called "permanent inflation". It can be seen when the government prints more money to pay off various obligations and expenditures, although it is not considered a very common phenomenon.

In order to determine what causes hyperinflation, it is necessary to consider the two most common factors of inflation: money supply growth and supply-demand imbalances. In most cases they interact to create a perfect economic storm.

To cover increased spending, the government will print more money. This can happen in hard times as a means to help citizens. The problem with this strategy is that printing more money has a number of consequences. As the money supply increases, prices go up and inflation is born! And the more money poured into the economy, the closer it is to hyperinflation. This is quite risky because it can lead to a depreciation of the currency.

The imbalance of supply and demand in the economy is another source of inflation. Demand arises when increasing consumer demand for certain goods and services exceeds the existing supply of those goods and services. If an increase in demand is associated with a shortage of these goods and services, market prices rise. Demand-pull inflation is widespread in emerging economies.

The effects of hyperinflation

One of the most visible symptoms of hyperinflation is the depreciation of the U.S. dollar. Since 1935, the U.S. dollar has lost approximately 96% of its value. In 2020, the U.S. currency has depreciated by 12% compared to a group of other countries. This decline in the purchasing power of the dollar is affecting people all over the world, not just Americans. It affects everyone. For the first time in a long time, China has not depreciated its currency to the level of the U.S. dollar, signaling that it may be reducing its dependence on the U.S. market.

The U.S. population may hoard money to avoid paying more if resources become scarce and prices rise due to hyperinflation. If left unchecked, this trend could destabilize the economy. While it may seem that finding ways to save money is beneficial, the fact is that hyperinflation renders monetary savings useless.

As a consequence, to understand how inflation may affect your retirement, you may need to reconsider your retirement plans. When calculating how much money you need to save before you retire, you’ll have to take inflation into account. Once you know how much money inflation is taking away from you, you’ll need to develop a more thorough strategy for your financial future. However, the solution to all of these problems is not to print more money. If the government pours more money into the economy, the more fuel for hyperinflation.

Popular examples of hyperinflation in the past

In the 1920s, after World War I, the Weimar Republic in Germany faced hyperinflation. To combat rising inflation, the bank issued some 92 quintillion Deutsche marks (the German currency). This strategy worked until Germany was burdened with reparations from the Allies at the end of the war. The additional debt of 132 billion brought production to a halt, food shortages and rising prices to compensate. Every day the inflation rate rose to about 21%.

The last time hyperinflation occurred was between 2013 and 2018. As a result of efforts to promote a new cryptocurrency, the Venezuelan bolivar became a weak form of money. In addition, the country had a debt of more than $100 billion. As a consequence, the employment rate plummeted and almost equaled that of the Great Depression in the United States. Inflation in 2018 was 65,000%. By 2023, the country was still experiencing hyperinflation.

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