“Hyperinflation is going to change everything. It’s happening.”
On October 22, 2021, co-founder and CEO of Twitter, Jack Dorsey, tweeted this from his personal account. The billionaire technology entrepreneur then followed this tweet with another:
“It will happen in the US soon, and so the world.”
Since then, notable economic commentators have rebutted Dorsey’s ominous proclamation. But as an American consumer, you can’t help but wonder if Dorsey’s tweets and claims from others indicating the possibility of hyperinflation are accurate. Why would the CEO of Twitter believe that the United States is headed towards such extreme economic circumstances?
Prices have gone up—this we know for sure. Due to significant shortages caused by the supply chain crisis, shoppers will also find more empty shelves in their local grocery stores and out-of-stock items as they shop online.
So, bottom line—should you be worried? What is hyperinflation, and will it affect you personally?
In this blog, we’ll explain what hyperinflation is and the impact it could make on you and our society. But first off—if you’re here because you frantically searched for information on hyperinflation and you’re stressed out of your mind—breathe. Relax and read on to inform yourself so you can start thinking about how you should prepare!
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What is Inflation?
Before we explain hyperinflation, let’s first discuss inflation. If you’ve ever heard a senior citizen talk about how much cheaper everyday items were in their day and wondered why that is, inflation is most likely the culprit.
Inflation is the rate of an increase in prices over a given time. This general increase in prices reflects a decrease in the purchasing value of money. Essentially, this means consumers must spend more units of currency to purchase items over time because the value of their currency is falling. That’s why your grandpa’s dollar could take him further than yours—his dollar had more purchasing power.
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What is Hyperinflation?
Hyperinflation is an extremely rapid rate of inflation. Many economists believe this phenomenon occurs when the prices of goods and services rise more than 50% per month. Whereas inflation is typically more noticeable over a period of years, hyperinflation is detectable on nearly a daily basis. You could purchase an item from a store, head back to the store the next week or even later that week, and find a noticeable increase in price for that exact item.
Because of its unpredictability, hyperinflation has been the stuff of nightmares for doomsday preppers and now, everyday consumers.
Has the United States Ever Experienced Hyperinflation?
There are differing opinions on whether the United States has truly experienced hyperinflation before since the figures used to define inflation (such as the 50% rise per month) are not concrete. However, the two historical periods some would refer to as periods of hyperinflation or the closest to hyperinflation in America were during the Revolutionary War and towards the end of the Civil War.A During these periods, the wars created high debt and supply disruptions, contributing to economic turmoil and arguably hyperinflation.
What is certain is that the U.S. has certainly experienced its fair share of recessions, with the most recent happening in 2020. Widely considered the country’s worst recession since the Great Depression, the stock market crashed, 20.6 million jobs were lost, and the unemployment rate reached 14.8%.B There’s no question whether or not the state of the economy was in jeopardy in 2020, but even with these devastating blows, hyperinflation never occurred. So what does it take for hyperinflation to occur? Let’s talk about that next.
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What Causes Hyperinflation?
A hurting economy can show its face in different ways, such as drastic drops in stock prices and a widening trade deficit. However, hyperinflation is rare. If you’ve lived in the U.S. since 2000, then you’ve already experienced the repercussions of three recessions (2001, 2008, 2020), but never hyperinflation. So, what exactly needs to happen for this to occur?
Because inflation is a direct result of a currency losing its value, two things must happen for hyperinflation to take effect.
Hyperinflation Can Occur When:
1. Money Injected into the Economy Is Not Supported by Economic Growth
What gives money its value? Money is essentially a good, and the value of any good is subject to supply and demand. There is a limited supply of money, and therefore, a demand for it.
This system works as long as all parties, including other countries, believe and agree on the value of a country’s money. People work to earn money, and then they use that money to purchase the goods and services they need.
So, what happens when money is injected into the economy, increasing supply? Well, if that money is not accompanied by economic growth, then its value can go down.
Because money is also a method of exchange, its loss in value affects purchasing power. This results in a consumer needing to spend more of it to purchase the same goods and services as before. Does this sound familiar? It’s the textbook definition of inflation, but it’s now accelerated due to the rapid supply increase.
2. Demand-Pull Inflation
When demand outstrips supply, sellers must meet this need by attempting to increase supply. But if this is not feasible, then sellers must raise their prices. This is usually the result of an increase in spending either by consumers or governments.C
Key Takeaway
If the value of money goes down, a consumer must spend more of it to purchase goods or services. If this is coupled with an increase in prices due to shortages caused by demand-pull inflation, then there is a greater possibility of hyperinflation.
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Is Hyperinflation Going to Happen in 2022?
The recent rise in prices in conjunction with shortages worldwide is definitely something to be mindful of as we approach 2022.
But is hyperinflation really something that could happen? Was Jack Dorsey, the CEO of Twitter, accurate in his prediction, stating, “it [hyperinflation] will happen in the US soon, and so the world?”
If you look at the occurrences of hyperinflation that have taken place in the last century, such as Germany in 1922, Hungary in 1945, or even the more recent occurrence in Venezuela during 2016, you’ll notice a few common trends. There was some destabilizing event such as a war or natural disaster followed by a sharp decline in production capacity, and then an attempt to correct this with stimulus measures funded by printing money.
Now, let’s look at some current events happening in the country today.
1. Trillions of U.S. Dollars Injected into the Economy
In an attempt to offset the drop in economic output caused by the COVID-19 pandemic, the U.S. Federal Reserve (Fed) printed trillions of dollars in 2020. In a May 2020 report from USA Today, the Fed had claimed that $3.5 trillion would be virtually “printed” and injected into the commercial banking system by the end of the year. However, since that time, some estimates now indicate that it ended up being closer to $10 trillion by the end of the year and that up to 40% of the active money supply in the U.S. economy today was printed in 2020 alone.D
2. Global Shortage & Increase in Consumer Demand
Since trillions have been injected into the economy since 2020, you may be wondering why hyperinflation is just now a major topic of discussion? Going back to the previous section, the second primary cause for hyperinflation is demand-pull inflation. When demand outstrips supply, then sellers must raise their prices. And up until recently, consumer spending has been subdued due to the pandemic, keeping demand exceptionally low.
Utilizing the Consumer Price Index (CPI), most prices for common, everyday items stayed reasonably stable throughout 2020 because the demand was low. However, throughout 2021, demand noticeably rose. According to the real gross domestic product revised estimate (third estimate), consumer spending increased by 6.7% in the second quarter of 2021, following a 6.3% increase in the first quarter.E
An increase in consumer spending is typically linked to a healthier, growing economy. But what if this happens when supplies are low? Shortages happen. And an increase in demand met with a shortage of supplies, lack of laborers, and increased costs for transportation results in raising prices for products.
Bottom line: What we do know is that hyperinflation is rare for developed economies, but that doesn’t mean it’s impossible. Considering recent events, inflation is likely to increase at an accelerated rate, but that doesn’t necessarily mean that hyperinflation will occur. Again, the conventional marker for hyperinflation is 50% per month, which is an exceptionally high rate.
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Final Verdict – Should You Be Worried about Hyperinflation?
Now that we know what hyperinflation is, what causes it, and we’re up to speed with the current events that have us asking this question—it’s time to answer it.
Each person’s unique financial circumstances dictate the extent to which you should prepare for such a crisis. Whether or not it reaches the percentage threshold to be considered hyperinflation, a rise in inflation is something you need to be mindful of for the future. It would affect you personally. It would affect your families, friends, neighbors, communities, and entire nations.
Yes—hyperinflation is a scary word. But should you be worried about it? Worried is not the word we would use. Instead, you should be smart about it. Don’t be scared out of your wits, but rather, use them to prepare you and your loved ones.
Hyperinflation is rare, but a rise in inflation is imminent, and we can all take steps to help safeguard ourselves and our communities for any challenges we may face soon.
Be on the lookout for our next blog about what you need to buy before hyperinflation hits!
This blog is not intended to provide any tax, legal, financial planning, insurance, accounting, investment, or any other kind of professional advice or services. To make sure that any information or suggestions in this blog fit your particular circumstances, you should consult with an appropriate tax or legal professional before taking action based on any suggestions or information that we provide.