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This Is What Hyperinflation Does. Are We Headed There?

Photo credit goes to JP Valery at Unsplash.

With the onset of rising prices, “hyperinflation” is being uttered all over the political commentary space. Hyperinflation is defined by two things–the price of goods and time. Inflation, in the typical sense, is a gradual rise in prices and doesn’t always come with negative consequences. However, hyperinflation is a different beast.

Hyperinflation is the excessive rise in the prices of goods over a short period of time–inevitably, it leads to the devaluation of a countries’ native currency, and thus, economic destruction. Historically, the powers that be will compensate for price hikes via printing more currency. But this is counterintuitive. The more a currency is printed, the less valuable it becomes, and the prices of goods will continue to rise.

The United States’ inflation rate clocked in at a 13 year high of 5.4% in September per reports from the Bureau of Labor Statistics. The 5.4% figure reads from the all-items index and is slightly over some economists’ estimation of 5.3%. Gas, food, and used cars all have seen price hikes.

Conservative voices have expressed their criticism of the administration’s economy handling. Ben Shapiro, arguably the most known conservative voice in The United States, released a video earlier this year in support of hard-asset cryptocurrencies. Inflation and the printing of USD (citing the economic relief packages of 2020 & 2021) was a frequent theme in Shapiro’s video. Other financial gurus have begun to adopt cryptocurrencies, as seen on Twitter.

It isn’t certain if the powers of The United States will let the dollar capitulate. It’s the world reserve currency, after all. But Biden’s recent spending proposals are concerning, and around a third of USD in circulation were printed last year. It would be imperative to review the history that accompanies superfluous paper printing and deficit spending now that Biden’s 1.7-trillion dollar Build Back Better bill has been introduced.

Weimar Germany

Weimar Germany is the world’s prolific example of the economic consequences of printing currency and debt accumulation. Germany exclusively financed its involvement in World War I via borrowing money from Allied forces–Germany’s plan was to win the war and impose reparations on their defeated enemies. Effectively, Germany was using leverage, or borrowed debt, to come up with capital. But things fell through when Germany was defeated by their lenders. Their plan backfired, and Germany was ordered to pay reparations to Allied countries once the The Treaty of Versailles was enacted, which called for 132 billion gold German marks.

Germany scrambled, and began to print Papiermarks that weren’t tied to the value of gold. Gold marks which the Versailles treaty called for were costly. Therefore, Papiermarks were exchanged for foreign, hard currencies to pay off their war debts. This devalued the Papiermark over time, but Germany continued frantically printing marks for exchange to try and fulfill their monetary obligation.

The printing would eventually catch up. When Germany made its first debt payment in the summer of 1921, the USD to Papiermark ratio was 1:90. Though about 16 months later the Papiermark depreciated to a 7400:1 ratio–almost a 9000% decrease in value compared to the USD. Printing Papiermarks in exchange for foreign currency was like moving in quick-sand.

By November 1923, a single United States Dollar was worth 4,200,000,000,000 German Papiermarks. The currency was now virtually useless. German citizens started to burn Papiermarks to heat their homes and line the walls. It was cheaper than anything else they had.

Venezuela

Venezuela’s economic collapse stems from political unrest and oil dependency. Corruption is common in Venezuelan history, but the Caracazo riots in 1989 were a political inflection point. Weeks on end, Venezuelans rioted in protest of gas hikes caused by economic reforms. The riots turned violent, allegedly leaving 3000 dead. Venezuelan authorities deny the number.

President Andres Perez reformed the economy then in attempts to pay off Venezuela’s rising debt. But oil demand was tanking across the global markets–the country’s profit driver–and left the economy sinking. Moreover, the country suffered a banking crisis in 1994 through 1995 that cost 1.2 trillion Bolivars; 12 billion dollars in USD terms. By now the poverty rate had doubled since the 1980’s according to some estimates.

Eventually, Chavez was elected president in 1999 on promises of a second economic reform, which had mild improvements. Though Chavez began appointing loyalists to the PDVSA board–the oil company went on strike and organized protests, claiming government overreach. In response to his new political enemies Chavez fired 19,000 employees, and Venezuela’s oil production came to a near halt. This lead to a decline of oil reserves and accumulation of debt through Chavez’s presidency. After the PDVSA debacle Chavez expanded his control by ceasing term limits and closing media outlets, preparing the way for an authoritarian predecessor: Nicholas Maduro.

Almost immediately after Maduro took office in 2013 the Venezuelan economy plummeted. Maduro began deficit spending and printing Bolivars in compensation. Three years into his presidency Venezuela inflated 800%. By 2018, 2,000,000%. Maduro slashed zeros off of the Bolivar this year in efforts to recoup the economy. However, he would never fulfill his promises of lower inflation rates. Venezuelans now suffer food, clean water and medicinal shortages prompting many to emigrate.

Zimbabwe

Zimbabwe inherited a structurally sound economy when it gained independence from Britain in 1980. Against all odds, there was finally a black-majority rule, and the country raised up its first President: Robert Mugabe. Mugabe had gained “The Jewel of Africa”–Zimbabwe boasted fertile soil and multiple waterways, which were accomplice in supporting the country’s booming agricultural production.

Though, to no surprise, Zimbabwe became another example of government mismanagement and the printing of currency that onsets hyperinflation. With a sprinkle of authoritarianism, of course.

In 2000, Mugabe initiated a land reform handing over thousands of private agricultural acres to native Zimbabweans and his loyalists. Allegedly, Mugabe acquired 15 of his own farms. These “reforms” were forced. Private farms were invaded by Mugabe followers, militia and local police. Farmers were ran out of their houses and some were even held hostage according to a narrative report by The Atlantic.

The forced seizure initiated the downfall of the Zimbabwean economy. The once skillfully curated lands that produced a large portion of the country exports was now occupied by agricultural novices. Food production fell by 60%, businesses closed and 8/10 citizens were unemployed according to The Cato Institute. Adding fuel to the fire, The Reserve Bank of Zimbabwe began printing currency to pay off their ballooned government staff, an International Monetary Fund loan and municipal projects.

The country eventually fell into humanitarian crisis and now boasts the second largest inflation rating: 89-sextillion percent. In fact, the inflation ratings were so horrendous the country stopping publishing economic statistics, and at one point machines suffered data problems because they were unable to handle the number of zeros.

100-trillion Zimbabwe dollar. Public domain, from Reserve Bank of Zimbawe.

What About The USA?

The numbers don’t lie–The USA is seeing inflation. Speculating whether The States will see definitive hyperinflation is difficult, however, there are some eerie similarities between the USA’s economic metrics and the aforementioned cases. According to the U.S. National Debt Clock the nation’s debt is honing in on 29-trillion USD, and last year, deficit spending creeped over 3-trillion. The debt to GDP ratio is over 100% and has been since 2016.

All of this is before the potential passing of Biden’s economic bill.

Hopefully, Washington figureheads will heed warnings of the past instead of leaving their heads in sand, wishing the data would disappear.


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