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Author Topic: Why did hyperinflations happen?  (Read 3916 times)
kuba_10
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May 29, 2011, 10:23:30 AM
 #1

There were several hyperinflations in the world. From mild ones, such as in France after WW2, through more serious, like in many Middle-European countries after 1989 and ending in drastic causes, like 1922-23 German hyperinflation and 1945-46 one in Hungary. I do not understand why is hyperinflation happening. OK, the main cause is that governments want to cover growing costs with newly printed currency. But why don't they stop at some point? Let's say, it's after-war period in some country. Studies report that, for example 500 million dollars is needed to cover costs of the country's revival. So, the government introduces 500 dollar notes and prints a million of them. But soon it comes out that these actions dropped the currency's purchasing power dramatically. And from now on I don't understand the concept. The central bank sees that what could be bought for $10 before war, now costs $500. So it issues $1000 and $2000 notes to provide essential high denominations. But the prices drop and now $2000 is worth less than $500 before. So the wheel spins and $5000, $10,000, $50,000 etc. up to $100 billion are printed. Do I understand the process correctly? Or there is someone who can explain it a bit?

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May 29, 2011, 11:22:40 AM
 #2

simplified explanation: there is not enough goods and services to be bought by the money that exists => money owners compete in spending them and this is driving prices up (since gov & central bank have issued more money than there are things that the money can buy)

this backfires, government needs to buy as well the stuff that is now more expensive (tax revenue will probably not be enough) so they print more money adding presure to the spending competition.
why don't you try wiki? i bet my 7 bitcents that english and especially german wiki about hyperinflation are pretty explanatory.
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May 29, 2011, 01:26:53 PM
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go to mises.org and search through their media database. I'm confident you'll find your answers.

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May 29, 2011, 03:41:45 PM
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There is no physical way possible that rates of inflation as seen in Zimbabwe and the Weimar Republic can be caused by issuing currency. Understand that we are talking about inflation rates approaching a trillion times the original rates of money supply growth. There are not enough printing presses in the world to produce the high quality notes used for currency.

Uhm, yes there is- a country makes bills that are of much larger denominations. Zimbabwe introduced notes which were of larger and larger denominations until the currency completely collapsed. I happen to have a 100 trillion dollar Zimbabwe note that I bought off of Ebay for $3 (and that's me paying for the novelty of it, not any sort of exchange).


From Wikipedia:
The paper notes were Z$500, 100, 50, 20, 5 and 2. The coins were Z$5, 2, 1, 50, 20, 10, 5, and 1 cents. As the inflation rose, larger bills were needed to pay for menial amounts. The bills that ultimately were printed ranged from the original denominations up to Z$100billion. The Central Bank of Zimbabwe planned to print and circulate denominations of up to Z$10, 20, 50, and 100 trillion.[34] The Central Bank would no sooner print and distribute one denomination of its currency and within days there would be a new announcement of a higher denomination being printed. The announcement for the Z$200,000,000 bill came just days after the printing of the Z$100,000,000 bill.
As inflation rose, the government continued to print larger and larger bills. They did not attempt to combat the inflation with other fiscal and monetary policy. In 2006 before the hyperinflation reached its peak, the bank had already announced that it would be printing larger bills to buy foreign currencies. This led the Reserve Bank to print a Z$21trillion bill to pay off debts owed to the IMF.
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May 29, 2011, 04:14:58 PM
 #5

Hmm why does hyperinflation happen. Well that's a really tough question.

Well actually it's not at all. All you have to is follow the current events in Belarus: http://www.zerohedge.com/article/welcome-hyperinflation-hell-following-currency-devaluation-belarus-economy-implodes-sets-blu

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May 29, 2011, 04:42:20 PM
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It's basically caused by millions of people suddenly realizing that their paper investments (retirement funds) aren't really backed by anything, and withdrawing them all at once.  Just think of the tens of millions of workers who quietly invest and re-invest large percentages of their income and are too busy to really manage it properly.

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May 29, 2011, 07:47:37 PM
 #7

The massive printing of huge bills is an effect of hyperinflation not (usually) it's cause. Hyperinflation is caused by a loss of faith in a currency. This can be caused by various things, massive printing is one of them and not the usual one. When people don't believe that their money will hold value anymore them immediately spend it on anything they think will. They don't want to wait and pay any price. Now if the government still wants to get hold of stuff they need more money than ever and they print it. It is already too late at this point. Eventually everyone gets it and no one accepts bills above their value as paper.

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kuba_10
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May 29, 2011, 09:31:30 PM
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And that's what puzzles me; why do they print millions of new notes, even if they lose value within few days (for example, I have 100 billion pengő banknote dated 04/29/1946 and 10 trillion one dated 05/24/1946 - that's one month only!)? If no one uses it anyway (I don't believe somebody would - it wasn't just possible to pay with earned money, when you got 500B one day and a week later a loaf of bread costs 2T!), why do governments continue to print over and over?

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May 29, 2011, 11:00:18 PM
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To try and maintain the appearance of at least some credibility.

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May 29, 2011, 11:42:00 PM
 #10

And that's what puzzles me; why do they print millions of new notes, even if they lose value within few days (for example, I have 100 billion pengő banknote dated 04/29/1946 and 10 trillion one dated 05/24/1946 - that's one month only!)? If no one uses it anyway (I don't believe somebody would - it wasn't just possible to pay with earned money, when you got 500B one day and a week later a loaf of bread costs 2T!), why do governments continue to print over and over?

When $1B dollars buys a house you promise a soldier $1B, later it buys a coffee, but you don't have it anyway. Print........

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May 29, 2011, 11:44:20 PM
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To try and maintain the appearance of at least some credibility.

Yeah, but otoh, you might think of defaulting to try to shock people back into hoarding money. "OMG, the welfare fund is empty, maybe save a little in case this stuff catches value again." Not saying it would work, but in these situations nothing really is, so, try?


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hazek
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May 29, 2011, 11:46:41 PM
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Actually it's just a way to default on their debt. That's all it really is and they have to do it because they want to keep the appearance of paying off their debt.

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May 30, 2011, 09:10:56 AM
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I do not understand why is hyperinflation happening. OK, the main cause is that governments want to cover growing costs with newly printed currency. But why don't they stop at some point?

But eventually most of them do stop. It just takes them a while - and lots of misery and suffering from the people they control - to accept reality. Stop printing means they either have to cut expanses or increase taxes, probably a strong mix of both.

I think the only example of government that did not stop was Zimbabwe, at least the only one I am aware about. They printed so much the people themselves abandoned the currency, and the government couldn't enforce its use any more.

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May 30, 2011, 09:25:00 AM
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While the amount of available currency (M0) amounts to maybe a little over $1 trillion, the other components of the money supply are many multiples of this. M2 includes bank accounts, money market accounts, and money market mutual funds and most likely measures in the teens of trillions... And then there is M3 which includes certificates of deposit, deposits in foreign currencies, and repurchase agreements (a type of loan), it is not easy to get a measure of M3 because the Federal Reserve stopped publishing this metric after 2005. But it is in these derivative tiers of the money supply where hyperinflation takes place. It should make you very uneasy that the mechanics of these levels of money creation are kept from public accountability...

All monetary aggregates are multipliers of the M0. If the M0 remains constant, these aggregates can only cause inflation/deflation if the multiplier changes, for example, if the compulsory decreases, that will increase the M1. But that's the only way and it's a limited effect. These aggregates multipliers are most of the time constants. And when they are constant, the only way the monetary offer can increase is if the monetary base increases. That's the true source of inflation.

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May 30, 2011, 09:29:47 AM
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It's basically caused by millions of people suddenly realizing that their paper investments (retirement funds) aren't really backed by anything, and withdrawing them all at once.  Just think of the tens of millions of workers who quietly invest and re-invest large percentages of their income and are too busy to really manage it properly.

Massive withdraw of money from the fractional reserve system would most likely cause deflation of the monetary offer, with banks going bankrupted and all the M1 created by them vanishing...

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May 30, 2011, 10:45:36 AM
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The massive printing of huge bills is an effect of hyperinflation not (usually) it's cause. Hyperinflation is caused by a loss of faith in a currency. This can be caused by various things, massive printing is one of them and not the usual one. When people don't believe that their money will hold value anymore them immediately spend it on anything they think will. They don't want to wait and pay any price. Now if the government still wants to get hold of stuff they need more money than ever and they print it. It is already too late at this point. Eventually everyone gets it and no one accepts bills above their value as paper.

I don't know any example of hyperinflation which hasn't being caused by massive increase of the monetary base... I lived in hyperinflation when a kid, and the cause was pure money printing... can you cite an example when people just lost faith in government's currency, without this one printing it like crazy before?

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May 30, 2011, 11:07:07 AM
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The massive printing of huge bills is an effect of hyperinflation not (usually) it's cause. Hyperinflation is caused by a loss of faith in a currency. This can be caused by various things, massive printing is one of them and not the usual one. When people don't believe that their money will hold value anymore them immediately spend it on anything they think will. They don't want to wait and pay any price. Now if the government still wants to get hold of stuff they need more money than ever and they print it. It is already too late at this point. Eventually everyone gets it and no one accepts bills above their value as paper.

I don't know any example of hyperinflation which hasn't being caused by massive increase of the monetary base... I lived in hyperinflation when a kid, and the cause was pure money printing... can you cite an example when people just lost faith in government's currency, without this one printing it like crazy before?

Erm, I can't.

I may have overstated the point. Printing certainly could be the cause of a hyperinflation and maybe most are caused that way I don't know. A government that sat stable for a long time doesn't just suddenly printing instead of taxing for no reason, right?

I am interested and will probably read about this more tomorrow, I'll let you know if I find anything decently convincing that agrees with me.


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May 30, 2011, 11:59:39 AM
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The massive printing of huge bills is an effect of hyperinflation not (usually) it's cause. Hyperinflation is caused by a loss of faith in a currency. This can be caused by various things, massive printing is one of them and not the usual one. When people don't believe that their money will hold value anymore them immediately spend it on anything they think will. They don't want to wait and pay any price. Now if the government still wants to get hold of stuff they need more money than ever and they print it. It is already too late at this point. Eventually everyone gets it and no one accepts bills above their value as paper.

I don't know any example of hyperinflation which hasn't being caused by massive increase of the monetary base... I lived in hyperinflation when a kid, and the cause was pure money printing... can you cite an example when people just lost faith in government's currency, without this one printing it like crazy before?

Erm, I can't.

I may have overstated the point. Printing certainly could be the cause of a hyperinflation and maybe most are caused that way I don't know. A government that sat stable for a long time doesn't just suddenly printing instead of taxing for no reason, right?

I am interested and will probably read about this more tomorrow, I'll let you know if I find anything decently convincing that agrees with me.



I don't know about "no reason", but they can certainly come up with one.  Look at the US.  Ever since 2001, we've funded the majority of our wars with printed money and/or debt.

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May 30, 2011, 12:20:49 PM
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I don't know any example of hyperinflation which hasn't being caused by massive increase of the monetary base... I lived in hyperinflation when a kid, and the cause was pure money printing... can you cite an example when people just lost faith in government's currency, without this one printing it like crazy before?

IMO, it is less than clear whether confidence decline or monetary base expansion or some other factor is, strictly speaking, the cause of hyperinflation.  The microeconomic reasons are clear enough (supply/demand imbalance, presumably owing to everyone trying at once to sell their cash before it all becomes worthless), but in macro terms, I guess there is some debate about this.

In a hyper-inflationary economy, i.e., rapidly rising velocity of money coupled with rapid monetary inflation, the situation pretty much requires a printing press (in this way money is quite opposite to buggy whips), because if there is to be any hope for a return to a state-currency-based economy, there must exist a sufficient monetary base to service the real wealth of the country (put another way, if the entire monetary base isn't enough to buy a roll of toilet paper, it is obvious that the monetary base will need to greatly expand to serve any sort of useful function as an instrument of exchange and savings, barring some sort of deflationary event).

All of that being stated, not sure if any examples exist without massive printing of money.  Maybe Argentina sort of exemplifies a confidence based hyperinflation?  (Even so, I'm pretty sure they printed a bunch of money, and this compounded existing confidence problems).

btw, hello, welcome to my first post   Cheesy

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May 30, 2011, 12:55:44 PM
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In a hyper-inflationary economy, i.e., rapidly rising velocity of money coupled with rapid monetary inflation, the situation pretty much requires a printing press (in this way money is quite opposite to buggy whips), because if there is to be any hope for a return to a state-currency-based economy, there must exist a sufficient monetary base to service the real wealth of the country (put another way, if the entire monetary base isn't enough to buy a roll of toilet paper, it is obvious that the monetary base will need to greatly expand to serve any sort of useful function as an instrument of exchange and savings, barring some sort of deflationary event).

No, the situation does not require that the government keeps releasing hell on its victims. It can stop printing. It will "only" have to find another way to fund its activities, as well as re-index its debt if it's indexed on the hiperinflationary currency.
And regarding the toilet paper example, if there's no money printing, prices will adjust, and you would be able to buy it.

As Mises said, in the long run, any quantity of money is enough.

btw, hello, welcome to my first post   Cheesy

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