Hyperinflation: a devastating economic phenomenon

In the economic sphere, inflation is a natural process that affects all economies. It is characterized by the widespread increase in the prices of goods and services, which leads to a decrease in the purchasing power of the coin. Normally, governments and financial institutions work together to keep inflation under control, allowing for gradual and sustainable growth. However, history has witnessed numerous cases where inflation has gone out of control, reaching unprecedented levels and causing a dizzying fall in the real value of the national coin. This extreme phenomenon is known as hyperinflation.

Economist Philip Cagan, in his work "The Monetary Dynamics of Hyperinflation," establishes that this process begins when the price increase exceeds 50% per month. Let's imagine a scenario where a kilo of bread goes from costing 5 to 7.5 euros in less than 30 days, and then to 11.25 euros the following month. We would be facing a case of hyperinflation. If this trend continues, the price of bread could reach 57 euros in six months and exceed 500 euros in a year.

It is important to note that hyperinflation rarely stays at that initial 50%. In most cases, price escalation accelerates exponentially, varying drastically in a matter of hours. This phenomenon triggers a series of dire consequences: loss of consumer confidence, monetary devaluation, business closures, rising unemployment, and reduced tax revenues. Countries like Germany, Venezuela, and Zimbabwe have experienced notoriously infamous episodes of hyperinflation, although they are not the only ones; Hungary, Yugoslavia, and Greece, among others, have also suffered similar crises.

The German case: lessons from the Weimar Republic

One of the most well-known episodes of hyperinflation occurred in the Weimar Republic after World War I. Germany had incurred enormous debts to finance its participation in the conflict, relying on victory to settle them with the reparations imposed on the allies. However, the defeat not only thwarted these plans but also forced the country to pay hefty indemnities.

Although the causes of German hyperinflation are a subject of debate, three main factors are usually pointed out: the abandonment of the gold standard, war reparations, and the uncontrolled issuance of paper money. The suspension of the gold standard at the beginning of the conflict broke the relationship between the amount of money in circulation and the country's gold reserves. This controversial decision caused a devaluation of the German mark, leading the Allies to demand payment of reparations in other currencies. Germany's response was to print huge amounts of marks to acquire foreign currency, which further accelerated the depreciation of its currency.

In the most critical moments of this period, inflation grew by more than 20% daily. The German mark was devalued so much that some citizens opted to burn banknotes to heat their homes, resulting in being more economical than buying firewood.

Venezuela: oil crisis and mismanagement

Venezuela, thanks to its vast oil reserves, maintained a robust economy for much of the 20th century. However, the overproduction of oil in the 1980s, followed by poor economic management and widespread corruption in the early 21st century, led to a deep socio-economic and political crisis. This crisis, which began in 2010, has become one of the most severe in modern history.

Inflation in Venezuela skyrocketed quickly, rising from an annual rate of 69% in 2014 to 181% in 2015. Hyperinflation broke out in 2016, with a rate of 800% by the end of the year, climbing to 4,000% in 2017 and exceeding 2,600,000% in early 2019.

In 2018, President Nicolás Maduro announced the issuance of a new coin (the sovereign bolívar) to combat hyperinflation, replacing the previous bolívar at a rate of 1/100,000. Thus, 100,000 bolívares were converted into 1 sovereign bolívar. However, the effectiveness of this measure is questionable. Economist Steve Hanke stated that removing zeros is "a cosmetic issue" and "means nothing unless economic policy is modified."

Zimbabwe: from ESAP to economic collapse

After its independence in 1980, Zimbabwe enjoyed some economic stability during its early years. However, the government of Robert Mugabe implemented the Economic Structural Adjustment Program (ESAP) in 1991, considered one of the main triggers of the country's economic collapse. Along with the ESAP, the agrarian reforms promoted by the authorities caused a drastic fall in food production, triggering a severe financial and social crisis.

The Zimbabwean dollar (ZWN) began to show signs of instability in the late 90s, and at the beginning of the 2000s, hyperinflation episodes started. The annual inflation rate reached 624% in 2004, 1,730% in 2006, and 231,150,888% in July 2008. Due to the lack of official data, subsequent rates were based on theoretical estimates.

According to calculations by Professor Steve H. Hanke, hyperinflation in Zimbabwe peaked in November 2008, with an annual rate of 89.7 sextillion percent, equivalent to 79.6 billion percent monthly or 98% daily.

Zimbabwe was the first country to experience hyperinflation in the 21st century and recorded the second worst inflationary episode in history ( after Hungary). In 2008, the ZWN was officially abandoned and foreign currencies were adopted as legal tender.

Cryptocurrencies: A Alternative in Times of Crisis?

Cryptocurrencies, not relying on centralized systems, are outside the control of government or financial institutions. Blockchain technology ensures that the issuance of new units follows a predefined schedule and that each coin is unique and impossible to duplicate.

These characteristics have contributed to the growing popularity of cryptocurrencies, especially in countries facing hyperinflation, such as Venezuela. Similar trends have been observed in Zimbabwe, where payments between individuals using digital monedas have experienced a significant increase.

In some countries, authorities are seriously evaluating the possibility of introducing government-backed cryptocurrencies as an alternative to the traditional monetary system. The central bank of Sweden is among the pioneers in this field. Other notable examples include the central banks of Singapore, Canada, China, and the United States. Although many entities are experimenting with blockchain, it is important to note that these systems are not necessarily going to revolutionize monetary policy, as it is unlikely that their cryptocurrencies will have a limited or fixed supply like Bitcoin.

Final reflections

Although episodes of hyperinflation may seem isolated, it is evident that a relatively short period of political or social instability can quickly lead to the devaluation of traditional coins. The fall in demand for a country's main exports can also be a triggering factor. Once the coin depreciates, prices skyrocket rapidly, creating a vicious cycle. Some governments have attempted to counteract this problem by printing more money, but this tactic alone has proven to be counterproductive, serving only to further diminish the overall value of the coin. It is interesting to note that as confidence in traditional coin decreases, interest in cryptocurrencies tends to increase. This phenomenon could have significant implications for the future conception and management of money on a global scale.