How does Hyperinflation Happen and Could We Expect it in 2022?
The new threat of “hyperinflation” is sweeping the USA off its feet. While it is a rarity in the economy and is triggered by extreme conditions, still it is better to know about this impending threat than to underestimate it.
On October 22, Jack Dorsey, the co-founder and chairman of Twitter and CEO of Square made a revelation on hyperinflation through a tweet, which says,
“Hyperinflation is going to change everything. It’s happening,”
Following this, a wave of panic spread among people and questions like “What is hyperinflation?” and “How does hyperinflation happen?” started popping up.
We are anyway living in the time of a global pandemic. With businesses being significantly down and strict restrictions around everywhere, several individuals are already going through emotional and financial turmoil. Therefore, it is obvious that people would be overwhelmed if such an influential person took to a powerful platform to openly discuss it.
However, now is not the time to jump to conclusions. Many experts have said that the claim made by Jack is absurd. How much truth does his claim hold? This article will explore strategically and will guide you through every aspect of hyperinflation.
What is Hyperinflation?
To understand what hyperinflation is and how does hyperinflation happen, let us first understand what inflation is.
Inflation refers to decline in purchasing power of the consumers occurring as a result of rapid increase in prices of goods and services.
Hyperinflation takes inflation on a severe scale. It happens when the value of the dollar falls significantly as opposed to the prices of goods and services, which increase at an alarming rate. However, hyperinflation happens once in a blue moon in developed countries.
In the year 2019, the rate of inflation was around 1.81% in America and 0.62% in 2020 and 2.24% in 2021. The highest annual rate of inflation that America ever experienced since 2010 was 3.14% in 2011. For hyperinflation to happen, the inflation rate needs to be over 1000% per year, as per experts.
How Does Hyperinflation Happen?
Primarily, there are two major causes of hyperinflation: demand-pull inflation and an increase in the money supply.
The demand-pull inflation is when the demand exceeds the supply in a country. This can happen because of many reasons such as a war, a global catastrophe, or even illegal hoarding of goods to create more demand. Surprisingly, even a growing economy can cause this. When people have more money, they want to spend more, increasing the demand in the market, which can lead to the value of products going up.
The other major cause of hyperinflation is excessive supply of money. We have all heard the old debate that if you are low on money, just print more. Well, if more money is printed, the prices will also go up. This especially happens when the government of a country is in debt. To pay off the outstanding debts the government starts printing more money, which subsequently increases the prices of regular commodities and hence the money in circulation. Thus, Hyperinflation tends to happen at the times of economic depression.
The effects of hyperinflation can be immense. It can lead to increasing poverty and unemployment. It drops the value of the currency in the local and global space and can make things incredibly expensive.
The popular example of this would be Germany’s hyperinflation of 1920. During World War 1 for the war reparations, the government printed too much money to bridge the gap between the demand and supply of the country.
Could we expect it in 2022?
Now since we know how does hyperinflation happen, it is time to find out whether or not it should be considered as a threat for 2022. As per Experts, hyperinflation is a rare phenomenon. Therefore, the probability of it happening in 2021 is extremely low.
Well, this comes as a sigh of relief for the developed economy of the USA . Of course, the threat looms over us due to the major upheaval caused by the global pandemic. The repercussions of heavy spending in response to control and preventing Covid-19 spread have hit nations hard economically.
But still the US stands strong and tall economically. Moreover, Steve Hanke, professor of applied economics at Johns Hopkins University and an expert in the area of hyperinflation in response to Jack Dorsey’s statement says that:
“Hyperinflations are rare birds. By my count, there have only been 62 episodes of hyperinflation in world history, and none have occurred in the United States,”
Likewise, several economists and experts in this field have declared the claims of Dorsey in connection to hyperinflation as overly hyperbolized. Even though the rate of inflation has gone up due to the pandemic supply-chain issues, most experts remain optimistic that it will be addressed, maybe not soon, but soon enough.
How to prepare for Hyperinflation?
However, it never hurts to be prepared for rainy days. Here are some strategies that you could apply in your life that can at least give you a boat if a storm is to come.
1. If you have any debt right now, work towards paying it off as soon as possible. During hyperinflation, the rates of interest are sure to rise and as a consequence of the situation, you might not even be able to pay it off.
2. Try to get rid of your unnecessary spending habits and learn to live frugally. Your spending habits may be how hyperinflation happens in the nation. Well, not yours particularly, but many more people such as you. It will increase the demand a way more than the supply and that too when we are already living in the shadow of Covid 19.
3. As the value of the dollar tumbles, the value of gold and silver will only rise. This is a great time to buy some gold so that you can easily get by if a crisis occurs.
4. Side hustles and multiple streams of income are the names of the game. Due to hyperinflation, several businesses may fall, and if you only have one source of income, then things might get a little tough for you financially.
5. Diversify your investments as you are diversifying your career. Now is the time to invest in some cryptocurrency, or even real estate, commodities like oil, ETFs, bonds, and so on.
Covid has taught us that like life, everything is unpredictable. This does not mean that you have to panic thinking about a global crisis such as hyperinflation. It just means that you need to be prepared well in time to deal with such disasters. More importantly be mentally prepared for unexpected events but make sure you learn to sail swiftly through them.
If you already have an umbrella, you need not be scared of the rain!