Is 2022 the Worst Hyperinflation Ever? In a word, no | Rosland Capital



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Is 2022 the Worst Hyperinflation Ever? In a word, no

Oct 31, 2022
Is 2022 the Worst Hyperinflation Ever? In a word, no

We’re all feeling the pinch of inflation right now. According to many sources, it is the highest it has been in 40 years. But if we look to history, it’s clear that inflation has been as bad (or worse) as it is right now. For example, in the 1970s and 80s in the United States.

But what is hyperinflation? This article will look at the characteristics of hyperinflation and some of its causes.

What is Hyperinflation?

One of the most common reasons for inflation is directly related to supply and demand. If supply is low and demand is high, prices will rise, but usually, it’s not significant enough to make a huge difference in people’s lives. It’s called demand-pull inflation.

But when the price of goods and services rises more than 50% over a specific period, that’s called hyperinflation. When this occurs, people’s buying behavior tends to change. Occasionally there are supply shortages due to people overbuying or hoarding goods, especially food. Some may find paying their bills more difficult than in the past or put off certain purchases. Quality of life may also suffer.

As you can imagine, inflation of this type—hyperinflation—has significant consequences for the economy. But how does it happen? And what’s the prognosis?

The Americas in the 1970s

The most recent and perhaps most famous episode of hyperinflation in the United States was in the 1970s. This was a time of soaring inflation and interest rates, the combination of which led to what is known as “stagflation”—a period of economic stagnation combined with inflation.

In 1980, the annual inflation rate in the U.S. peaked at 13.58% and remained high for several years after that.

How Did This Happen?

Many blamed it on oil prices. The Arab-Israeli war in 1973 saw an embargo on oil coming into the U.S. A few years later, the Iran-Iraq war further contributed to a limited supply, resulting in an almost 70% increase in gas prices. Compared to today’s situation, we’re not quite there. Though we experienced a 58% increase in fuel costs over the past year, those statistics represent a rise after a significant drop in 2020, when demand was at an historic low.

Price and wage controls (monetary policy) implemented by the federal government at that time also contributed to inflation. These strategies allowed for growth in the money supply, leading to what some consider to be a failure of American economic policy.

Beyond U.S. Borders

But while the United States experienced high inflation in the 1970s and early 1980s, we were not alone. In particular, countries in South America were dealing with hyperinflation.

For example, in 1974, Chile’s inflation rate reached 746%. By comparison, the highest inflation rate in the United States during that time was 11.04%.

All things considered, it could have been worse in the U.S. Even in periods of high inflation, the U.S. has yet to experience the levels of hyperinflation that plague other parts of the world.

Yugoslavia 1992-1994

Yugoslavia claims the third worst and second most prolonged hyperinflationary period in modern history.

Economic mismanagement by the government, military conflict in the region, excessive deficit spending, and political instability all contributed to the situation. The country accepted an IMF loan, which some observers say was mismanaged. Money was over-printed, large deficits were amassed, price controls were enacted, and many companies simply stopped paying employees so they could avoid bankruptcy.

Some stores chose to close and retain their inventory because selling their stock would put them at a loss. Goods were scarce. In the midst of the crisis, unemployment was almost 25%.

In January 1994, inflation peaked at 313 million percent, rising more than 64% daily. By some estimates, prices increased by five quadrillion percent during this time.

Before 1991, the country’s annual inflation rate was 76%, but things were about to become much worse. Even after converting one million dinars to one “new” dinar, the Yugoslavian dinar was so undervalued that the German Deutsche Mark (DM) became the preferred currency. At this point, one million “new” dinars equaled one DM. After five revaluations, the Yugoslavian government issued a “super dinar,” the equivalent of 10 million “new new” dinars.

Zimbabwe 2007-2008

In 2008, Zimbabwe entered a hyperinflationary period in which prices doubled every 24 hours. The highest monthly inflation came in November 2008, when rates hit 79.6 billion percent. At this point, 500,000 Zimbabwe dollars (ZWD) was equal to USD $0.25.

The South African rand became the accepted currency until the Reserve Bank of Zimbabwe stepped in, closed the country’s stock exchange, and balanced the ZWD to the US dollar.

Many said the debacle had its roots in the country’s governmental incompetence. Supply dwindled as a result, and prices increased, setting off a chain of events that led to its economic collapse.

Zimbabwe’s then-leader, Robert Mugabe, printed excess money to pay off IMF loans and civil servant salaries. Food, fuel, and medical supplies were scarce. As prices of goods soared, the government implemented a wage freeze, further impacting Zimbabweans’ ability to purchase even the most basic goods and services.

Eventually, they ran out of paper to print money, as paper suppliers in Europe refused to sell to them based on humanitarian concerns.

Venezuela 2017/2018

In 2017, Venezuela was on the brink of an economic crisis. They had struggled with inflation for many years amid political and socio-economic instability, finally reaching a peak in 2018 under the controversial leadership of Nicolás Maduro. In 2014, they achieved the dubious honor of the highest inflation rate in the world which continued to multiply. By the end of 2019, the IMF estimates that the inflation rate in Venezuela was 10,000,000%.

The situation in Venezuela is an example of how quickly hyperinflation can spiral out of control. In just a matter of months, the country went from one of the richest in South America to the brink of collapse.

So, how did one of South America’s most stable democracies, a nation so rich with petroleum that they once provided free oil to heat Americans’ homes in NYC, reach that point? For a country that at times has produced more oil than Saudi Arabia, it would seem unthinkable.

Causes point to over-printing of money and deficit over-spending, coupled with sinking crude oil prices. Some pointed to U.S. sanctions against Venezuelan oil, gold, and the Central Bank of Venezuela as well as the PDVSA, Venezuela’s state-owned oil and gas company.

The sanctions, meant to put pressure on Maduro’s regime, hindered the country’s paths to financing. To counter the sanctions, they continued to sell oil and gold at deep discounts to countries like Russia and India, often in exchange for imported food and medical supplies.

PDVSA’s mismanagement has also been blamed for their economic woes.. Equipment was not maintained, resulting in a substantial reduction in drilling rigs, extended downtime, and higher accident rates. At the end of 2020, there were no PDVSA rigs in operation. According to the Cato Institute, the PDVSA has destroyed more economic value than any institution in history.

The Road to Recovery for Venezuela

Venezuela wrapped 2021 with an inflation rate of 686%. While that’s nowhere near what we could call “recovery,” it was an improvement from the hyperinflation of just a couple of years ago. By January 2022, the preferred currency had become the U.S. dollar, and monthly inflation had dropped to under 50%.

Despite the positive trend, consumer confidence is low. Citizens are still reeling from a time when the currency would spectacularly plummet daily, and that’s not bound to change overnight.

Are We Headed for Hyperinflation?

The Federal Reserve reports inflation at 8.2% in September 2022, which lends some context to the extreme crises described above.

Though some believe that government stimulus packages could contribute to situations similar to hyperinflation, it is improbable. Inflation is part of a country’s typical economic ebb and flow.

Every country experiences it at some point, and it’s not something that “ends” or comes to a stop.

In the view of some economists, it just gets less bad.