…Hyperinflations are caused by extremely rapid growth in the supply of “paper” money. They occur when the monetary and fiscal authorities of a nation regularly issue large quantities of money to pay for a large stream of government expenditures. In effect, inflation is a form of taxation in which the government gains at the expense of those who hold money while its value is declining. Hyperinflations are very large taxation schemes….
If you have the time, watch this series on hyperinflation from the National Inflation Association:
A Bag Of Money To Buy A Loaf Of Bread?
One of the stories that she would tell took place after the First World War. Germany lost and, in so doing, agreed to the Treaty of Versailles. In addition to the loss of geographical territory, the German Weimar Republic was forced to pay enormous sums in reparations. In essence, the Germans had to pay for all of the damage done in the war. Germany did not have the financial means to pay these damages and their solution was to just print money.
As this new money moved into circulation the impact was devastating to the German economy. The inflation rate was absolutely staggering. A few years after the end of the war the German economy had an inflation rate in excess of 300% per month! The economy had essentially collapsed and the country was experiencing a depression of enormous proportions. This set the stage for the rise of the Nazi party several years later.
Which brings us back to my grandmother’s story. She would tell me how her father and brothers, all coal miners, would get paid twice a day. The currency was devaluing so fast that it needed to be spent as fast as it was earned. My grandmother told of collecting the money and going shopping for food. The grocers didn’t even bother counting it, they just estimated the amount by how large the stack was. A loaf of bread could be purchased for two bags of money in the morning, by the afternoon the price might be three bags. The currency had so little value that people would burn it in their stoves for heat because wood had more value than the money.
We Are Getting $700 Billion From Where?
The US dollar is a fiat currency. That means that it is not backed by gold or any other asset but instead is backed by “the full faith and credit” of the United States Government. As we increase the national debt we are destroying faith that the rest of the world has in our economy. As that faith erodes the dollar will fall further, and imported goods (read oil) will cost more and more. The inflation that we are already experiencing can quickly turn to hyper-inflation if we keep spending money that we don’t have.
Hyper-inflation is an end-stage terminal cancer to any fiat currency. However that inflation does not immediately follow the event that caused it. In Germany the Weimar republic began printing excess money in 1919, but the hyper-inflation didn’t take hold until a few years later. It may be several years before we see the real effects of the proposed bailout that we have before us.