How Hyperinflation Happens

Excellent article written by Gonzalo Lira, here, about how hyperinflation happens. His key point: hyperinflation is not to be confused with inflation, although most people think hyperinflation is just a case of normal inflation on steroids.

--Normal inflation happens because of growing demand, and growing credit, driving prices up.
--Hyperinflation happens because the currency is collapsing.

People commonly confuse the cause with the effect in economic events.

Like a) the common idea of blaming the Great Depression on protectionism. In fact, protectionism was a response to the Great Depression.

Or like b) blaming the German printing press for causing their hyperinflation of the early 1920s. In fact, the German money was collapsing in value, which led the government to print more money to help people cope with having less wealth. The political impetus to follow this line of action is almost irresistable, and we shouldn't be surprised to see our own government do the same thing.

In short, hyperinflation happens because money-holders start selling dollars to buy other commodities. The result is that the dollar collapses in value, while the cost of all goods shoots up quickly.

Although he doesn't talk about it in his article, I would point out that America is especially vulnerable to this type of inflation because we don't make any of our own goods anymore. Because all of our consumer goods are made in foreign countries, a sell-off on the dollar means that not just commodities, but also all consumer goods, will shoot up in price.

Note that this event would not necessarily be drawn out with dramatic scenes of barrels of paper money being exchanged for bread. That would only happen if the federal government attempts to alleviate our suffering by printing and distributing paper cash. If the government starts doing that, then the hyperinflation can be dragged on, and money can gradually shoot towards infinity.

Most likely, our government will not resort to printing out piles of cash. In that case, our hyperinflation would be short and sharp. Everything would rise 300-1000% in price, and we would also be tremendously poorer, but then things would stabilize. The new normal would us simply being much poorer with a greatly devalued dollar. The world would have to find a different country to be buyer of last resort, and the dollar would lose its status as reserve currency.