Question

The International Monetary Fund’s estimate for inflation in Venezuela in 2019 is 10 million percent (that is really 10,000,000%) – clearly a good example of hyperinflation. What problems does this cause at a microeconomic level (focus on individual households/businesses)? What problems does this cause at a macroeconomic level (focus on economy-wide issues)?

Answer 1

Hyperinflation is a term used to describe price increases in an economy that are severe, unsustainable, and out of control. While inflation is a measure of the rate of rising goods and services rates, hyperinflation raises inflation rapidly. Although hyperinflation is a rare occurrence for developed economies, it has happened in countries like China, Germany, Russia, Hungary, and Argentina many times throughout history.

Hyperinflation can affect an economy in a number of ways. People can stockpile products as a result of rising prices, including perishables such as meat, which in turn can trigger food supply shortages. As prices rise dramatically, the value of cash or savings deposited in banks decreases or becomes useless because money has far less buying power. The financial situation of consumers is worsening and may result in bankruptcy.

In periods of severe economic instability and recession, hyperinflation occurred. A recession is a contracting economy's prolonged period, meaning the rate of growth is negative. Usually, a recession is a period of negative growth lasting for more than two quarters or six months. On the other hand, a recession can last years but also exhibits extremely high unemployment, corporate and personal bankruptcies, lower economic production, and reduced borrowing or credit available. The solution to a recession is generally a rise in the central bank's money supply. The extra money is designed to encourage the development of spending and investment by banks to lend to consumers and businesses.

Extremely rapid growth in the "paper" money supply causes hyperinflation. These happen when a nation's monetary and fiscal authorities raise large amounts of money on a regular basis to pay for a wide flow of government spending. In addition, inflation is a form of taxation in which the government is gaining at the expense of those who hold money while decreasing its value. Hyperinflation is a very broad system of taxation.

Hyperinflation decreases the productivity of an economy by driving people away from financial and barter transactions. In a normal economy, it is highly efficient to use money in exchange. People prefer to be paid in goods during hyperinflations in order to avoid inflation tax. They spend that money as quickly as possible if they are paid in cash. Workers in Germany were paid twice a day and were going to shop at midday to prevent more loss of their earnings. Hyperinflation is a needless "hot potato" game where people use valuable resources to avoid keeping on paper money.