Hyperinflation can be defined as a rapid, uncontrolled increase in the prices of domestic goods and the real value of the domestic currency erodes at a rapid rate. In terms of numbers, hyperinflation is when the prices of goods and services increase more than 50% per month. A ticket of bus to your work costs one amount in the morning and higher in the evening. In this case people tend to get rid of the money as soon as they receive it because the value of a dollar bill decreases every minute. The rapid increase in the prices is not compensated with an equal rise in wages and salary of people of the country, leads to decrease in standard of living of the people as they couldn’t even afford the basic needs.
Hyperinflation is not the only problem in itself. This hampers the entire economic process of the country and lead to a path of unemployment, starvation, poverty and worse. The rapidly depleting value of currency discourage people to invest in any kind of government bonds and store it in banks and financial institutions. Consequently, banks and financial institutions suffers from cash deficit and faces the difficulty in lending to the investors and high demand of credit increase the interest rates. Thus, the discouraged producers lead to a shortage of supply and with high demand the prices rise more. Furthermore, banks and financial institutions go out of business and contributes nothing in the economic activity. The country suffers an economic collapse with exponential increase in prices.
What causes Hyperinflation?
It generally happens when the money supply expands in depression but there is no corresponding economic growth. Depression is a phase where the country experience extremely low production, bankruptcies of companies, extreme unemployment for a period of more than a year. Thus, the central bank increases the money supply to encourage the economic activity. However, if the money supply is not supported by economic growth, this can lead to hyperinflation. Also, during the times of war people start to lose confidence in their government and their ability to maintain the currency value. When this happens, people start to buy commodities that have value and thus rise in prices. Government prints more to handle the rising prices which exacerbates the problem and leads to hyperinflation.
In 2008, Zimbabwe has a second highest incidence of hyperinflation on record. The inflation rate for November 2008 was 79,600,000,000% or 79.6 billion percent. This is approximately a daily increase of 98% or the commodities price doubles every day. It was caused in response of economic shocks by printing more and more money. People became “Poverty Billionaires” as it was no good to have one billion dollars when the loaf of bread costs two billion. You won’t believe that the country had a paper bill worth of 100 Trillion Zimbabwe Dollars for real.
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