The Roots of Hyperinflation

I have written the following because I do not think the dangers of hyperinflation and

currency collapse are understood;

Peter Shann

The most widely accepted view is that hyperinflation and monetary collapse results from

governments introducing large amounts of fiat money into the economy, Wikipedia comments;

"The main cause of hyperinflation is a massive and rapid increase in the amount of money, which

is not supported by growth in the output of goods and services. This results in an imbalance

between the supply and demand for the money (including currency and bank deposits),

accompanied by a complete loss of confidence in the money, similar to a bank run"

This explanation is superficial and doesn't provide answers as to why governments would in the

first instance "massively and rapidly increase the amount of money" nor why they would feel

compelled to continue with this as inflation increases by factors of thousands of percent and in

some extreme instances print banknote in denominations of 100,000,000,000,000 currency units,

it also fails to explain why newly issued money is not primarily invested in asset class goods or

why goods that can easily be replicated, as can most essential consumables, be often subject to

the greatest price inflation.

A prerequisite of hyperinflation and monetary collapse is that a disruption in the availability of

essential goods occurs. Today this could happen as a result of past reliance on expanding credit

and fiat money temporally facilitating dependency on low cost imported goods many of which

now feed primary needs leading to a commensurate loss of home production capacity with an

inherent delay to the medium−term should such re−engagement with manufacture become

necessary as it would in the event of off shore suppliers losing confidence in reciprocal worth of

monetary instruments offered in exchange for goods, and or shortage of essential goods may

arise as a result of natural correction occurring, by way of example from the collapse of

speculation driven credit markets and or as a result of collateral damage to the production cycle

caused by inappropriate governmental action in further increasing money and credit supplies in

attempt to drive a spontaneously occurring and necessary correction back in the direction of

instability and in so doing distorting essential work ethics and disincentivising investment in the

production cycle,

In my view the most probable sequence of events resulting in hyperinflation and monetary

collapse is as follows:

1. A broad based shortage of goods that are thought essential develops and this is not relieved in

time to satisfy demand.

2. Consumers trying to acquire essential goods that they believe are in short supply become

fearful and are prepared to pay increasingly higher prices and stockpile these goods further

increasing shortages and accelerating prices as a sellers market develops.

3. Prices rise for essential goods in short supply as an increasing proportion of the money supply

circulates in these goods, also with increasing velocity and as most of these goods are

consumables with high turnover upward re pricing quickly occurs.

4. The proportion of available money circulating in goods that are perceived as essential

increases and the demand for less essential goods diminishes I.e essentials become

disproportionately more expensive than the norm against non essential goods displacing money

towards the goods most in demand further fuelling inflation,

5. The shortage of essential goods accelerates as manufactures increasingly focus on short term

survival, longer term risk is avoided and investment in the production cycle is reduced

accelerating 1.

6. The normal balance of demand for all goods increasingly prefers those goods required to

satisfy primary needs and people engaged in making and supplying less immediately essential or

non essential goods become unemployed who then pressures governments accelerating

condition 9.

7. Eventually goods not immediately required but non the less essential are needed and rapidly

increase in price as they also become in short supply.

8. Consumers with least money first find it increasingly difficult to secure essential goods,

become frightened and are forced to allocate greater proportions of their money on essential

goods and demand greater income,

9. The demand for money forced by need and fear becomes irresistible so governments feel

insecure and provide increasing amounts of fiat new money,

10. Consumers first to spend the new money see some value but soon as this new money is

distributed and its value is lost, the velocity of money also accelerates as people rapidly

exchange money for goods, wealth is seen as best protected when stored as goods rather than

cash further increasing price and reinforcing condition 9,