PragCap: A Treatise on Hyperinflation

Zimbabwe Hyperinflation

Interested in learning about hyperinflation from someone other than a die hard goldbug? With all the T.V. and radio ads promoting gold these days and the term hyperinflation being tossed around by people who are hyper-ventilating, its no wonder most people have no idea what the term means and how it occurs.

Cullen Roche of the Pragmatic Capitalist blog has penned a very insightful treatise on the history of hyperinflation and how/when it actually occurs, titled “Hyperinflation, Its More Than Just A Monetary Phenomenon”.  It is not a long piece, but there are now hundreds of comments, which provide additional learning opportunities.

A few excerpts:

Contrary to popular opinion, excessively high deficit spending and exorbitant government debt levels are not the actual cause of a hyperinflation. In most cases they have been the result of other exogenous events such as ceding of monetary sovereignty, war, rampant corruption or regime change. It is these exogenous events that result in the public’s rejection of the currency, a collapse in the tax system and the government response of printing more moneyto fill in the confidence void. Ultimately the confidence void cannot be filled and the currency is fully rejected by the public in the form of hyperinflation.

The Cause and Effect:

What is consistent among cases of hyperinflation is a number of rare exogenous circumstances:

  • A ceding of monetary sovereignty (usually in the form of foreign denominated debt, a currency peg, etc).
  • Extraordinarily unusual social circumstances (war, regime change, etc.).
  • Very low levels of faith in government during regime change (high public mistrust).
  • Ineffective government response or rampant corruption.
  • Combustible political environment.
  • A collapse in the domestic economy.
  • A breakdown in the tax system.

The most notable environments involving hyperinflations are war, regime change, government corruption and a ceding of monetary sovereignty.

I encourage all of you who want to know more about inflation and hyperinflation to read this treatise, its not coming from a Gold salesman!

Scott Dauenhauer CFP, MSFP, AIF

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