What Inflation and Hyperinflation Are and How to Protect Yourself Against Them…

See also: Qué es la inflación y la hiperinflación y cómo protegerse…

Inflation has become a major point of discussion since the start of 2021. Housing prices have been going up, the value of stocks and cryptocurrencies have also been pumping, and supply chains have been disrupted.

Many of these effects could be blamed on the global pandemic and stemming from the way governments and central banks around the world have been reacting to the pandemic. In any case, inflation numbers have been higher than expected in many countries.

What is Inflation, and Is It All Bad?

Inflation happens when the overall value of a currency goes down over time. Inflation means that an individual currency’s value has decreased.

A currency’s value is determined by how much purchasing power it has in the market. When the cost of goods and services increases, this is typically an indication that the currency being used has inflated.

That loaf of bread you buy is no longer, for example, $2 but $2.30. This might not seem like a lot, but over time these small price differences add up and you end up getting less for your money.

Another form of inflation, which may be lesser-known, is “shrinkflation”. This means that the prices of goods stay more or less the same, but manufacturers try to make product sizes smaller to save money as production costs rise.

Now this sounds complicated, but what it means in practice is actually simple — just think your carton of milk was 1 liter before but is now only 900 milliliters. It still costs 2 dollars, but you end up getting less product than before.

This definition of inflation makes it seem like inflation would be all bad, right? Why would anyone want the value of their money to go down? Well, inflation isn’t all bad. As an individual, you benefit the most from inflation if you have debt. Because essentially, inflation is eating away your debt. Imagine having a mortgage of $100,000 while the dollar is inflating. You still owe the $100,000 but those dollars are now worth less, so you’re paying back a smaller amount when you’re paying back your loan.

Central banks try to keep the inflation levels of their currency at 1﹣5% to incentivize people to take out loans, stimulate demand and grow the economy. But how about those people who are not in debt? Those who’ve been told throughout their lives that saving money in a bank is a good plan for their future and the way to get wealthy?

Well, actually people who have been saving money in a bank have been losing money because the interest rates on their bank accounts have been low, and at the same time, the inflation has been running at 2% and more.

The History of The United States Dollar

The Federal Reserve, or the FED, the central bank of the United States, generally regulates and tries to control inflation. Its goal each year is to keep inflation at around 2%. This increase in inflation is said to keep the economy going benefiting everybody. The average inflation rate from the year 1900 to 2021 has been 2.92%, so it could be stated that the FED has succeeded fairly well in its inflation goal of 2%.

In 2021, the inflation rate in the United States according to the Consumer Price Index has reached a 31-year high of 6.2%. Inflation hasn’t hit these rates since the early 1990s. The most recent inflation has been credited to the Covid-19 pandemic, the supply chain shocks caused by the lockdowns and restrictions, and of course the massive printing of new money by the FED to stimulate the economy.

There are now 5 times as many dollars circulating in the economy compared to the year 1999. According to the laws of supply and demand, if the supply increases, it also dilutes the value of the currency, in this case of the United States dollar. The highest inflation rate that the US dollar has hit was around 20% in 1920. Overall, despite the recent developments, historically, the US dollar has been very stable compared to many other fiat currencies.

The Euro’s Purchasing Power

The euro is a major fiat currency in the world, and also somewhat of a newcomer in the fiat club with only roughly 20 years of history on its belt. The easiest way to evaluate the euro’s purchasing power is to compare it to the US Dollar.

The euro has consistently been worth more than the US Dollar since the early 2000s. Since 2002, the euro has maintained its purchasing power compared to other fiat currencies, and been more valuable than most currencies worldwide.

While the US Dollar had a 6.2% inflation rate in 2021, the euro has only had a 3﹣4% inflation rate so far this year. Historically, the euro is a stable currency, and the European Central Bank has managed to keep inflation rate more or less between 1 and 3 % over the last 20 years.

However, if you had been storing euros in a bank account throughout those 20 years, you would have been dealt quite a blow because the euro has steadily lost about 20% of its purchasing power in these 20-odd years. All in all, even though the euro is steadily losing value, at least for now it is faring a lot better than the US dollar.

Some other major fiat currencies that have historically been doing well are, for example, the Swiss franc and the Japanese yen. In Switzerland, the inflation rate in 2021 has been less than 1%, and also in Japan, the inflation rate has been starting with a 0 for many years now. These currencies are sometimes referred to as “safe havens” because historically these currencies have been doing well when there have been geopolitical crises.

The Worst Historical Example of Hyperinflation: Hungary in 1946

Hyperinflation is when the value of a currency reaches the point where it becomes nearly worthless, or the majority of the population tries to get rid of their cash. Hungary after World War Two is one of the worst examples of hyperinflation ever seen in history.

The inflation rate in Hungary in 1946 caused prices to double every 15 hours. This means that a carton of milk that would cost you two dollars in the morning could cost up to four dollars by the time you go to bed that same day.

This case of inflation is the single worst in history and was caused by the ending of World War Two. The Hungarian government had no production capacity to tax, so they decided to print money to pay off their debt instead and set out to stimulate the economy by printing as much cash as possible!

Recent Examples of The Highest Inflation

Over the last few years, there have also been a few instances of hyperinflation. In this article, we will examine some of them.

Zimbabwe

The road to hyperinflation in Zimbabwe started in the 1990s with some bad decisions by the government causing mismanagement of the economy. Later, the government tried to deem inflation illegal and even ordered arrests of merchants who tried to raise prices of their goods and services.

As you might expect, these actions didn’t really work because the people of Zimbabwe had completely lost their faith in the local currency by this point and inflation just continued to get worse.

An anecdote circulating amongst Zimbabweans to shed light on the country’s unfortunate situation tells a story of a man in Zimbabwe in 2008 (the peak time of their inflation) engaging in a barter trade in order to buy something.

Since the Zimbabwean dollar was suffering from hyperinflation and was therefore very weak, the man needed a wheelbarrow to carry all the Zimbabwean dollars required to conduct the trade. What did the seller do? Well, he didn’t care about the valueless paper notes, but just dumped the worthless dollars on the ground and bounced off with the empty wheelbarrow.

Venezuela

Ten years forward and to another continent: Latin America and Venezuela. Having historically been an oil-rich country, and in the last few years having also been a state in a situation resembling a humanitarian catastrophe, Venezuela certainly has a fascinating history when it comes to its politics and economy.

When oil prices started to drop around 2014, the Venezuelan government started to print money to support their economy. At one point, over 90% of all revenue for Venezuela came from oil exports. When the oil prices dropped, Venezuela’s economy also fell dramatically. To keep up with their spending, the Venezuelan government printed more money to cover the costs of their imports and debts.

By 2018, the people in Venezuela had clearly lost their faith in the currency of which inflation was 65,000% at one point in 2018. Venezuela’s currency, bolivar, literally became just a piece of paper. However, this paper didn’t become completely useless. Local artists started to show off their talent by putting the bolivars to good use. Did you know that it’s actually possible to make quite nice-looking bags, purses and other handicrafts from bolivar notes? Maybe that’s a good use case then for a currency that sheds 14 zeros from its value in just a few short decades?

Sudan

The inflation in Sudan has reached up to around 400% this year. Sudan is in the middle of a deep economic crisis, with low reserves often creating shortages of fuel, bread, and essential medicines.

To attract foreign investors, the Sudanese government underwent economic reforms monitored by the International Monetary Fund (IMF), including the removal of fuel subsidies and devaluation of the currency in February 2021.

The country has assured its citizens that the inflationary situation is recoverable, but that has yet to be seen in 2021. Luckily some Sudanese people have discovered the potential of Bitcoin as a way to protect themselves from inflation. In October this year, LocalBitcoins got 94 new customers from Sudan. Welcome to the LocalBitcoins family and happy saving!

Turkey

Turkey has a less dramatic inflation rate of about 20%. Nonetheless, for a person receiving a salary in Turkish lira, a double-digit inflation rate is concerning for sure.

The recent inflation in Turkey could primarily be stemming from the government’s measures to support its economy in the wake of the global pandemic. The Turkish central bank has decided to print more money to cover debt and to stimulate the country’s economy.

Turkey is not beyond recovery at this point, and an inflation rate of 20% doesn’t yet count as hyperinflation. However, developments in Turkey regarding its inflating currency are definitely a cause for concern for those saving money in lira, and something to monitor as we move into 2022.

Wrapping It Up

Examples of extreme inflation or hyperinflation are luckily quite rare in history. But it can still happen, even when you would least expect it. Typically, it takes a war, economic crisis, or a global pandemic to disrupt a stable currency and cause hyperinflation. Even then, everything is not always all doom and gloom. Corrections can be made, and a currency can get back to its regular inflation rates within a few years.

Most currencies have an inflation rate of around 1 to 3 percent, which seem to be on the safe side. Some warning signs for hyperinflation could be the government starting to lean too hard on one commodity, as was the case with oil in Venezuela, or the government being extremely corrupt.

As a citizen, it might be wise to protect your savings from inflation by investing in hard assets like Bitcoin. Bitcoin’s issuance policy is predictable which means that it can’t be printed or controlled by a government or central bank.

If you haven’t purchased your first bitcoin or satoshis yet, you can do so easily by signing up for an account on LocalBitcoins!