Friday, 29 July 2011

Hyperinflation, a dream or a disaster

Earlier we did post an interesting clip on Germany's 1923 hyperinflation and the effects of it on it's economy during that period. What is hyperinflation then?

Hyperinflation is like inflation, except it is out of control. Remember the joke that we crack on inflation yesterday? We mentioned that inflation is like continuous consumption of food without shitting. Imagine that hyperinflation is 10 times, or even 100 times worst than inflation. Economy that experience hyperinflation will see that their local currency loses their value very rapidly. Hyperinflation is seen as a twentieth-century phenomenon. Germany experienced it during 1923, Hungary experienced after world war 2, and some economies almost faces it.

What is the underlying reasons for hyperinflation? If you google the reasons, you may find that the most creditable answer you may find is due to the over extend of 'supply' of paper money into the economy. By printing and flooding more supply of paper money into the economy is really killing the 'real' value of the currency. This action is done in order to finance the expenditure of some nations. However, by doing that, increase supply of paper money will still need to find a place to land in. Some will invest it overseas in other economies in order to maintain the imbalance occurred due to trade imbalance. Some others will make sure that the extra 'supplies' will in terms 'stimulate' it's own economy.

These action maybe useful to a certain extend, but bear in mind it's like diluting a glass of orange juice. The more water added, the sweetness taste will be lost. Remember, paper money in today's world are regard as fiat money, without gold backing. This maybe a reason to explain the huge drive of gold prices and other commodities like silver to record high. It seem that investors are picking up this point of paper money losing its 'true' value over time of actions. Since that is the case, can we view it as an awareness of a bubble growing to an unstable state, and transferring it to another sector/asset class to fill another new bubble? Remember we mentioned in our articles on bubbles; it's the human action that causes this, and so the insanity must continue in order to satisfy the needs.

Another issue that may cause hyperinflation is also perhaps a small part on the imbalance between the rich, the middle and the poor. Over the years, there were many people that became millionaires, or even billionaires. However, if we take a close look on wages, most of the developed countries wages did not increase in correlation with the increase of asset prices. The number of rich individuals are growing every year. We cannot disregard the fact that the pie is only this small. If everyone is becoming millionaires, or even billionaires, the wages taken by the middle class will not be able to afford for most of the goods and services as inflation kicks in.

No matter how much fiscal policies authorities of the nation does, the issue on hyperinflation is still deem as 'man made' consequences. Think about it, without inflation, asset prices will not increase over time, businesses cannot raise their margin if commodity prices are still low, and people cannot make real wealth fast enough to counter the lost of 'true' value on the paper money over time. Hence, the transition of inflation to hyperinflation is the process that will make wealth super fast, and also the steps to reset the economy back.


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