What is hyperinflation?

zimbabwe 100 trillion 2009 obverse

Per Wikipedia:

Definitions used by the media vary from a cumulative inflation rate over three years approaching 100% to “inflation exceeding 50% a month.” [2] The definition used by most economists is “an inflationary cycle without any tendency toward equilibrium.”

For purposes of calculating foreign currency translation gains and losses, the IRS defines hyperinflationary currency as currency of a country in which there is cumulative inflation during the “base period” of at least 100 percent. The “base period” means the thirty-six calendar month period ending on the last day of the taxpayer’s current taxable year. Hyperinflationary would therefore be about 26% inflation per year, i.e. [(1.26 x 1.26 x 1.26) – 1.0] = 1.000376 x 100 = 100.0376%.

A one year sudden increase in inflation can have a dramatic effect, for example if for years 1, 2, and 3, a country’s annual inflation rates are 6%, 11% and 90%, respectively, the cumulative inflation rate for the three-year base period is [(1.06 x 1.11 x 1.90) – 1.0] = 1.24 x 100 = 124%, and the currency is hyperinflationary. [Per Treasury Regulation §1.985-1(b)(2)(ii)(D).]

Therefore, hyperinflation is a lower inflation rate than is commonly supposed. In just three years at 26% inflation, your dollars are worth half of their value now. At 6%, the rate suggested by Kenneth Rogoff, former chief economist at the International Monetary Fund, it takes 12 years to halve money’s value. The problem is that once inflation is triggered through monetary policies, the inflation rate is not easy to control and the repercussions are very unpleasant, as the 1970’s and 80’s clearly proved (let alone the 1930’s!)

See: “Inflating Our Way Out of This Mess? Why This Won’t Work”

One comment

  1. For every action there is an equal and opposite re-action. Physics is everything, everything is physics, as in Laws: Physics, Nature, dawg if it keeps the bed dry at night. At some point it must deflate, as “hyper”.

    Examples: we’ve just come out of a [deliberately] hyperinflated housing market… and I, and I believe Bob, are veterans of the dotcom…

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