Pragmatic Capitalism

Capital for Living a More Practical Life

About Hyperinflation and money supply

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Hi Cullen, so hyperinflation destroys the value of the currency meaning goods and services cost more with using excess of that worthless currency. How does the government or central bank then fix the situation? Is that currency replaced by another one with just a stroke of a pen? Or is there more to it like enforced Austerity and rise in interest rates to cool the hyperinflation?

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Posted by Incognito 7
Posted on 02/13/2017 9:23 AM
Private answer

To understand a specific hyperinflation’s cure we have to first understand its cause. I don’t think we can generalize about this too much as all hyperinflations are their own unique events. A currency can become worthless for many reasons and govt actions are just one cause. Generally, hyperinflations have been caused by other exogenous events (like war, depression, resource depletion, corruption, etc) and the govt responds in a way that exacerbates everything. It’s also worth noting that hyperinflations usually occur in economies where the use of cash is particularly high. This means that money creation is not merely a market function (like it is in most modern economies), but is a function of how much money the govt actually creates.

In most cases, the cure for a hyperinflation is revaluation. Everything else has to find an equilibrium relative to the quantity of “money” in the economy.

Keep in mind, in a credit based economy like the USA the odds of a hyperinflation are relatively low because the quantity of “money” is controlled by the banking system. More importantly, I would argue that the relevant measure here is the quantity of money-like instruments relative to real resources. In a credit based economy you have a lower probability of hyperinflation because so much of the money creation involves the creation of real resources.

Anyhow, not sure if I answered your question or not. Let me know what you think.

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Cullen Roche Posted by Cullen Roche
Answered on 02/13/2017 1:43 PM
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