Causes of hyperinflation

[semaforo]

   I am just wondering what causes hyperinflation. I have heard some people talking about the velocity of money being an important determinant of inflation, but I don't really know what is meant by velocity- is this the number of transactions relative to the size of the money supply? I remember savings being really important int eh Keynsian models, but I don't remember exactly why.

    A few questions- looking at cases of hyperinflation, how much did the money supply grow to result in hyper inflation, and how much was caused by selling pressure. I know in the Asian financial crisis, a lot of national currencies crashed just because of speculative selling, in spite of their monetary policy being basically sound.

   I think the answers to these questions could be helpful in determining to what extent the petrodollar would have to erode to reach the event horizon of inflation. I mean, there must be some equation, involving the growth of money supply, velocity of money, selling pressure, and productivity growth that could be helpful in modeling the breaking point...

[johnytelevision]

Print of money and government using it to pay for budget and too liberal policies towards banks.

[thaaanos]

Trade Imbalances, Trade Isolation

[Erdogan]

Expansion of money and credit. Only that. It can be allowed to accelerate only by the government deceiving the people into believing that there is another reason, like high profits on part of the capitalist pigs, or currency black market traders, or smugglers.

[keelba]

Everyday, people trade dollars for goods and services, and even other currencies. Don't think of it as "spending", think of it as trading. They do so because they have faith that the dollars they are receiving are or are going to be worth tomorrow roughly what they have traded for them today. No one cares what you "want" your dollars to be worth. All that matters is what the person (or business)you're trading them to thinks they're worth.

Think about Mt. Gox for a minute where people traded various currencies for Bitcoin. As long as people believed that Mt. Gox was going to be there tomorrow then people willfully traded there. Eventually, people were unable to trade there and, even though their account balances said they had X number of bitcoins, they were unable to trade them and others believed those bitcoins had lost all value. This was not all bitcoins, just Mt. Gox bitcoins. Essentially, people lost faith in Mt. Gox bitcoins and the owners of them could not trade them for other currencies. There are people betting today that those owners may get back some of those bitcoins and are willing to pay very small fractions of what that amount of Bitcoin may actually be worth. The value of those Mt. Gox bitcoins had essentially gone to zero.

The dollar works the same way. As long as people have faith in the currency then they will continue to trade for them. Once people think that the value of that currency is going to be less tomorrow than it is today, then they will not want to trade for them, or at least they will want to hedge against this inflation and want even more of this currency. Tomorrow they'll want even more. More dollars will have to be created to keep up with this demand. In this example, inflation is the result of hyperinflation, caused by a currency so weak that it has essentially lost its value.

Inflation and hyperinflation are not the same thing. You cannot say that hyperinflation is just inflation multiplied or "super" inflation. Inflation is an economic condition simply stated by "too many dollars chasing too few goods". More dollars printed means even more dollars chasing those same goods and hence, an increase in price. Hyperinflation is a socio-economic condition. No one knows or can predict exactly when it will happen and, chances are, no one will know they're in hyperinflation until long after it has begun. As long as the people trading that currency have faith that it will be worth roughly what it is worth today, they will continue to trade it. Once the people, as a collective, lose faith in that currency then hyperinflation begins.

[Lethn]

Hyperinflation is caused by drastically increasing the amount of money currently circulating in the economy through money printing, this was nearly impossible to do with a currency that was made from Gold or Silver because if you did things like mixing in copper with the metals people would notice it immediately and the currency would lose its value and therefore make prices rise because in order to buy things you would have to get more of the currency that has been hyperinflated.

People often wrongly confuse price velocity with hyperinflation/inflation as blatantly shown in this thread, while it can be an indicator the real thing to look at is how much money is currently circulating in an economy, this is why it costs so much just to buy one Bitcoin and why it costs even more to buy Gold. Currencies that have a limited supply are simply honestly reflecting how much currency is being pumped into the dollar for example which is being printed by the billions.

If we knew everything about the amount of volume going into the dollar and so on, yes we could potentially track it, but because the Federal Reserve is so secretive about its dealings and how much it prints we may never know until there's finally a crash or a depression.

https://www.youtube.com/watch?v=iFDe5kUUyT0 - This series of videos also explains tons of stuff like how the bond markets work etc.

[semaforo]

  Thanks for the replies. I recently read that inflation used to be defined as expansion of the money supply- 10% increase equals a 10% increase in prices.

    After watching some more videos and considering it, I think it is important to distinguish the monetary base and the money supply.

http://azizonomics.com/2013/04/25/even-after-all-the-qe-the-money-supply-is-still-shrunken/

[painlord2k]

Hyperinflation is concept completely different from inflation.
Inflation is about the increase of the supply of money.

Hyperinflation is a political phenomenon.
It happen when people holding the money stop believing inflation is a transitory phenomenon and start believing it is a continuous policy of the government.
From that moment, it do not really matter how much the supply of money increase, people will try to get rid of money ASAP buying anything.

Under normal circumstances (low/no inflation) people see the price of a good and say "I buy it now, maybe it could be useful in the future"
When inflation raise the prices, people will say "I will wait and I will buy when it will be needed/useful"
Later, when inflation increase they will say "Bettet to buy it now, before price rise again"
In hyperinflation they will say "It is not useful but I will buy it anyway because the money I hold will lose purchasing power tomorrow"

[g4c]

  Thanks for the replies. I recently read that inflation used to be defined as expansion of the money supply- 10% increase equals a 10% increase in prices.

    After watching some more videos and considering it, I think it is important to distinguish the monetary base and the money supply.

http://azizonomics.com/2013/04/25/even-after-all-the-qe-the-money-supply-is-still-shrunken/

Fractional reserve fiat system seems almost designed to leave the bag-holders crying.

The current money system is really quite a devious scheme, if you can grab an hour to watch this I recommend:

https://www.youtube.com/watch?v=jqvKjsIxT_8

[RoadTrain]

Hyperinflation is caused by loss of confidence in a particular currency by the majority of economic agents.
It results in an abrupt increase of money velocity and a subsequent shortage of a broad range of goods which fuels further price increases.
Basically it's just dumping money against anything that can preserve value (or at least not lose it that fast).

Hyperinflation is more likely to occur in an underdeveloped economy. Hyperinflation in a country like USA is highly unlikely and can possibly be caused by major catastrophe.

[g4c]

Hyperinflation is caused by loss of confidence in a particular currency by the majority of economic agents.
It results in an abrupt increase of money velocity and a subsequent shortage of a broad range of goods which fuels further price increases.
Basically it's just dumping money against anything that can preserve value (or at least not lose it that fast).

Yup.

Hyperinflation is more likely to occur in an underdeveloped economy. Hyperinflation in a country like USA is highly unlikely and can possibly be caused by major catastrophe.

I would say a larger country will definitely make for a longer lifetime of a fiat/fractional system.

But still; fiat/fractional systems have and always will fail, that is unless users can colonize the universe at an ever growing rate.

[RoadTrain]

But still; fiat/fractional systems have and always will fail, that is unless users can colonize the universe at an ever growing rate.

What will cause a modern fiat currency like USD to fail and hyper-inflate?

[keelba]

What will cause a modern fiat currency like USD to fail and hyper-inflate?

As has been said already on here at least a few times, hyperinflation is a loss of confidence in the currency by the people as a whole using it. Predicting when it will happen is like predicting when American Idol will be taken off the air. The show probably should have been shut down already but still it keeps holding on. Maybe people still watch it because nothing better has taken its place.

The USD is the same way. All signs point to a dollar so weakened it probably should have collapsed already and yet it still keeps holding on. Maybe the people still keep using it because nothing better has taken its place. Yet.

It's also very possible that hyperinflation has already begun but we haven't felt it enough to call it that yet.

[drew959]

You can buy trillion dollar notes from zimbabwe on ebay for a few dollars. That should give you an indication of what causes hyperinflation.

It is caused by excessive money printing and nothing else.

[IIOII]

Hyperinflation is concept completely different from inflation.
Inflation is about the increase of the supply of money.

Hyperinflation is a political phenomenon.
It happen when people holding the money stop believing inflation is a transitory phenomenon and start believing it is a continuous policy of the government.
From that moment, it do not really matter how much the supply of money increase, people will try to get rid of money ASAP buying anything.

Under normal circumstances (low/no inflation) people see the price of a good and say "I buy it now, maybe it could be useful in the future"
When inflation raise the prices, people will say "I will wait and I will buy when it will be needed/useful"
Later, when inflation increase they will say "Bettet to buy it now, before price rise again"
In hyperinflation they will say "It is not useful but I will buy it anyway because the money I hold will lose purchasing power tomorrow"

This. Instead of "political phenomenon", I would more generally say "psychological phenomenon".

Oversupply of money is the necessary precondition (which is also the definition of the term "inflation" which I prefer), but it's the psychological expectation that money will loose value in future that accelerates it's loss in purchasing power. This effect is self-reinforcing: The expectation of deprecation in purchasing power stimulates spending behavior, increased spending yields price increases for goods and services, which validate the expectation and reinforce the expectation of further currency deprecation, encouraging spending behavior even further...

[semaforo]

   I understand that the loss of confidence can cause hyperinflation- I guess my main question is what is the role of the velocity of money in this process? Somehow I think this is key to determining why the inflation rate remains low.


Can low money velocity result in deflation which counterbalances inflation?

[g4c]

But still; fiat/fractional systems have and always will fail, that is unless users can colonize the universe at an ever growing rate.

What will cause a modern fiat currency like USD to fail and hyper-inflate?

Central bank seigniorage.

[glen hodl]

Remember street fighter 2 and then street fighter 2 hyper fighting. Similar causes. People wanted more of a challenge  with their economy.

[RoadTrain]

Oversupply of money is the necessary precondition (which is also the definition of the term "inflation" which I prefer)

Why? How can we make sure that money is not over-supplied?

But still; fiat/fractional systems have and always will fail, that is unless users can colonize the universe at an ever growing rate.

What will cause a modern fiat currency like USD to fail and hyper-inflate?

Central bank seigniorage.

Care to elaborate? By which means?

[AT101ET]

Tax added on the minting of coins.
Money supply increases, government spending rises, an increase in consumer confidence, rise in value of commodities leading to hyperinflation after negative growth.