What is Hyperinflation? Causes of Hyperinflation. Effects of Hyperinflation. Examples of Economies that faced Hyperinflation. Countries like Hungary, Zimbabwe, Venezuela. Solutions of Hyperinflation.

1. Hyperinflation and Its
Effect on Different
World Economies
C005 Yashvi Bhatt, C015 Yesha Desai, C019 Devansh Dhruv
C027 Vedhaant Jain, C045 Manav Nagar, C047 Ram Parekh

2. What is Hyperinflation?
• Hyperinflation is very high, rapid, and continuous inflation. In a hyperinflation situation, the
prices of goods and services in an economy quickly rise to a level so high that they become
difficult to afford for most people.
• Hyperinflation is generally used to describe episodes when monthly inflation rate is greater
than 50%.
• It quickly erodes the real value of the local currency, as the prices of all goods increase.
• This causes people to minimize their holdings in that currency as they usually switch to more
stable foreign currencies, in recent history often the US dollar. Prices typically remain stable in
terms of other relatively stable currencies.

3. Causes of Hyperinflation
• Hyperinflation commonly occurs when there is a significant rise in money supply that is not
supported by economic growth.
• The increase in money supply is often caused by a government printing and injecting more
money into the domestic economy or to cover budget deficits. When more money is put into
circulation, the real value of the currency decreases and prices rise.
• Hyperinflation tends to occur during a period of economic turmoil or depression.
• Demand pull inflation can also cause hyperinflation. When prices of good soar people tend to
hoard creating a rapid rise in demand eventually creating shortages leading to hyperinflation.

4. Effects of Hyperinflation
• Hyperinflation quickly devalues the local currency in foreign exchange markets as the relative value in
comparison to other currencies drops. This situation, will drive holders of the domestic currency to minimize
their holdings and switch to more stable foreign currencies.
• In an attempt to avoid paying for higher prices tomorrow due to hyperinflation, individuals typically begin
investing in durable goods such as equipment, machinery, jewelry, etc. In situations of prolonged
hyperinflation, individuals will begin to accumulate perishable goods.
• However, that practice causes a vicious cycle – as prices rise, people accumulate more goods, in turn, creating
higher demand for goods and further increasing prices. If hyperinflation continues unabated, it nearly always
causes a major economic collapse.
• Severe hyperinflation can cause the domestic economy to switch to a barter economy, with significant
repercussions to business confidence. It can also destroy the financial system as banks become unwilling to
lend money.

5. Examples of Economies
that Faced Hyperinflation

6. Hungary (1946)
• Highest monthly inflation: 41,900,000,000,000,000%
Prices doubled every: 15.6 hours
• The worst case of hyperinflation ever recorded
occurred in Hungary in the first half of 1946.
• By the midpoint of the year, Hungary’s highest
denomination bill was the
100,000,000,000,000,000,000 (One Hundred
Quintillion) pengo, compared to 1944s highest
denomination, 1,000 pengo.
• The situation was so dire that the government
adopted a special currency that was created
explicitly for tax and postal payments and was
adjusted each day via radio.
• The pengo was eventually replaced later that year in
a currency revaluation, but it is estimated that when
the currency was replaced in August 1946, the total
of all Hungarian banknotes in circulation equaled the
value of one one-thousandth of a US Dollar.

7. Causes of Hyperinflation in Hungary
• Hungary’s agricultural sector was hit especially hard by the Great Depression,
and the country’s mounting debt forced the central bank to devalue the
currency to cover costs by loosening financial and monetary policy.
• When World War II hit, Hungary was in a weak economic position and the
central bank was almost entirely under the government’s control; printing
money based on the government’s budgetary needs without any sort of
financial restraint.
• Eventually, the inflationary environment became so dire that coins began
disappearing form circulation, beginning with the silver coins and even bronze
and nickel currency, as the component metals became far more valuable than
the coins themselves

8. • As the war wound down, the standing
government took full control of banknote
production without any tangible collateral,
and the occupying Soviet army
simultaneously began issuing its own
military money, which further reduced the
demand for the pengo.
• Hungary’s worst hyperinflation occurred
after World War II, and despite several
large-scale measures to stabilize the
currency, the only remedy was to introduce
a new currency, the forint, which had a
direct conversion into gold and thus into
other world currencies.
• The forint is still in circulation today, but it is
expected to be replaced by the euro within
the next several years.

9. Zimbabwe (2008)
• Highest monthly inflation: 79,600,000,000%
Prices doubled every: 24.7 hours
• With prices almost doubling every 24 hours, just days after
issuing a $100 million bill, the Reserve Bank issued a $200
million bill and capped bank withdrawals at $500,000, which
at the time was equal to about $0.25 US.
• The situation became so dire that shops in the country simply
began refusing the currency and the US dollar, as well as the
South African rand became the de facto medium of exchange.
• Inflation finally came to the end with direct intervention by the
Reserve Bank of Zimbabwe that re-priced the currency,
pegging it to the US dollar.

10. Causes of Hyperinflation in Zimbabwe
• The path towards hyperinflation began in the early 1990s when President
Robert Mugabe initiated a series of land redistribution programs that took land
from the country’s ethnically European farmers and gave the land to ethnic
Zimbabweans.
• The sudden removal of an entrenched and experienced farmer class severely
damaged the country’s capacity for food production, dropping supply far below
demand and raising prices as a result.
• In order afford the goods the government started printing money in spite of
increasing prices. This soared inflation.
• In 2006, the country printed 21 trillion ZWD to pay off loans from the IMF.
• In 2007, there were extreme shortages of basic food, fuel, and medical supplies.

11. • By April 2008, the $50 million note
was equivalent to $1.20 US, while
the central bank estimated that
country’s economy contracted over 6
percent from a year prior. The LA
Times reported in July 2008 that the
government ran out of paper on
which to print money as European
suppliers of the paper stopped
supplying the country due to
humanitarian concerns.
• The country’s eventual out-of-control
inflation was caused almost entirely
by governmental mismanagement.

12. Venezuela (2016)
• Highest monthly inflation: 1300000 %
• Prices doubled every: 24.7 hours
• Hyperinflation in Venezuela is the currency instability in Venezuela that began
in 2016 during the country's ongoing socioeconomic and political crisis.
• In 2014, the annual inflation rate reached 69%,the highest in the world.
• The rate reached 800% in 2016, over 4,000% in 2017,and about 1,700,000%
in 2018,and reaching 2,000,000%, with Venezuela spiraling into
hyperinflation.
• In April 2019, the International Monetary Fund estimated that inflation would
reach 10,000,000% by the end of 2019.

13. Causes of Hyperinflation in Venezuela
• By 2014 the value of Venezuela’s currency, the bolívar, and the prosperity of the Venezuelan
economy, was highly dependent on oil exports. More than 90% of the country’s export
earnings came from oil.
• These export earnings had enabled the government headed by Hugo Chavez from 1999 to
2013 to pay for social programs intended to combat poverty and inequality. From subsidies for
those on low incomes to health services, the government’s spending obligations were high.
• Then the global price of oil dropped. Foreign demand for the bolívar to buy Venezuelan oil
crashed. As the currency’s value fell, the cost of imported goods rose. The Venezuelan
economy went into crisis.

14. • The solution of Venezuela’s new president Nicolas Maduro,
who succeeded Chavez in March 2013, was to print more
money.
• That might seem silly, but it can keep the economy moving
while it gets over a hump caused by a short-term price shock.
• The Venezuelan crisis, however, just got worse as the oil price
continued to fall, compounded by other factors that reduced
Venezuelan oil output. International investors began looking
elsewhere, driving the value of the bolívar even lower.
• In these conditions, printing more money simply made the
problem worse. It added to the supply of currency, pushing the
value down even further. As prices rose, the government
printed more money to pay its bills. This cycle is what causes
hyperinflation.

15. Solutions

17. Higher
Interest
Rates

18. Introducing Cryptocurrency
• To fight hyperinflation the government of Venezuela launched its own cryptocurrency in 2018.
• The petro (₽), or petromoneda, was launched in February 2018.
• Petro is backed by the country's oil and mineral reserves, and is intended to supplement
Venezuela's plummeting bolívar fuerte ('strong bolívar') currency, as a means of
circumventing U.S. sanctions and accessing international financing.
• On 20 August 2018, the bolívar soberano ('sovereign bolívar') was introduced, with the government
stating it would be linked to the petro coin value.
• As of January, 2020, Venezuelan president Nicolás Maduro decreed it mandatory to pay with petro
for government document services and airplane fuel for planes flying international flights.

19. Dollarisation
• Occurs when the inhabitants of a
country use foreign currency in parallel
to or instead of the domestic currency
as a store of value, unit of account,
and/or medium of within the domestic
economy.
• This is effective because the real value
of non – monetary items does not
decrease, what decreases is the value
of the currency with which those
commodities are bought.

20. References
• https://www.cnbc.com/2011/02/14/The-Worst-Hyperinflation-Situations-of-
All-Time.html
• https://www.investopedia.com/articles/personal-finance/122915/worst-
hyperinflations-history.asp
• https://www.thehindu.com/business/markets/venezuela-to-cut-six-zeros-
from-prices-amid-hyperinflation/article35760633.ece
• https://en.wikipedia.org/wiki/Petro_(cryptocurrency)
• https://en.wikipedia.org/wiki/Hyperinflation_in_Venezuela