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Part 29 – Inflation v Hyperinflation
Hyperinflation helps illustrate the pernicious effects of inflation better than the scenario I set forth in my previous video. The adverse affects of inflation are brought into stark relief when we look at what happens in a hyperinflationary scenario.
What is the difference between inflation and hyperinflation? In some respects, not a lot.
The only real difference between inflation and hyperinflation is “velocity of money”. This might sound complicated, but it isn’t. Velocity of money describes the rate at which money moves through society – how often it changes hands.
In a hyperinflationary scenario, people spend the currency they have earned as fast as they can because they are concerned that the currency is losing its value – so better to spend it as soon as possible. So oftentimes, people get their wages and rush out to spend them as soon as they can, buying whatever is available in order to convert the devaluing currency to some kind of hard asset.
Under such a scenario, your salary becomes worth less and less each month / week / day / hour. And if prices are doubling every day, (or rather, if the purchasing power of the currency is dropping by a half every day) what is the point in working?
Unfortunately, any savings sitting in a bank account become worth less and can get completely wiped out. Currency does nothing in the bank, but lose value.
So, the movement is from worth less (worth less and less and less) to worthless i.e. worth nothing, nothing at all.
And it’s a vicious circle. People realise that their money is becoming worth less and less each day so they spend it as fast as they can.
The velocity of money speeds up – getting faster and faster. It’s a negative feedback loop. That only ends in one way - badly. Very, very badly.
Mike Maloney on YouTube does a very good job of showing this operation. In fact, I would highly recommend you watching his whole series “the Hidden Secrets of Money”. It will prepare for what is to come.
The currency - fiat currency - is not a store of value like real money is. I shall go into details about all this in another video.
The Deutsche-Mark in the Weimar Republic is an often cited example of a currency which has undergone hyperinflation. In 1923 the inflation rate was 30,000 % - prices of products doubled every 4 days.
What does this mean? What happens in a real-world, hyper-inflationary scenario?
There is the typical of examples of people having a wheelbarrow of money to buy goods, or the cost of bread being a month’s wages. But these are not made up – these are not the inventions of my imagination. These are real world situations. They actually happened.
There are a couple of academics (Hanke-Krus) who have studied this phenomena and produced a set criteria for calculating the inflation rate, or rather the rate of hyperinflation. They have produced a hyperinflation table – showing the time for prices to double.
N.B. They say “prices doubling” where as they should say “currency de
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