What is Hyperinflation?

In simplest terms, inflation means that money buys less than it once did. No matter where you live, it starts adding up if your personal income doesn't reflect an increase to offset the reduction in the purchasing power of the nation's currency.


So, what is hyperinflation?

According to Philip Cagan, who wrote some of the definitive works on the subject, hyperinflation occurs when the rate of inflation exceeds 50% per month. If hyperinflation held at that rate consistently for an entire year, an item that cost $1 on January 1, would cost $129.75 on January 1 of the following year.



In some instances, hyperinflation has caused prices to double within a matter of hours.


How can we tell if we are headed in that direction? What leads an economy into hyperinflation?

Hyperinflation is caused by a rapid expansion (inflation) of the unit of currency without a balance of goods and services to offset the money supply with adequate demand.




According to the Federal Reserve Bank of New York...

"As of December 2007, currency in circulation, that is, U.S. coins and paper currency in the hands of the public, totaled about $829 billion dollars. The amount of cash in circulation has risen rapidly in recent decades and much of the increase has been caused by demand from abroad. The Federal Reserve estimates that the majority of the cash in circulation today is outside the United States."


Congressman Ron Paul (R-Texas), made some revealing statements in his "Texas Straight Talk" post from March 28, 2010.

"The Federal Reserve finds itself in an unprecedented and unenviable position. To keep up with government spending and corporate irresponsibility, it has increased the monetary base by nearly $1.5 trillion since September of 2008. Excess bank reserves remain at historically high levels, and the Fed's balance sheet has ballooned to over $2 trillion. If the Fed pulls this excess liquidity out of the system, it risks collapsing banks that rely on the newly created money. However, if the Fed fails to pull this excess liquidity out of the system we risk tipping into hyperinflation. This is where central banking inevitably has led us."


Add $1.5 trillion to $829 billion and you have $2.329 trillion, which means the Federal Reserve tripled the money supply in about a year and a half (from September 2008 to March 2010), and who knows how much more has been printed since then.

Most of the world has government fiat currency and a fractional reserve banking system. Here in the U.S., our legal tender (the Federal Reserve note) is fiat currency. It is not backed by anything of real value. Additionally, within the fractional reserve banking system, most of the "money" doesn't exist in any form whatsoever, outside of a database or ledger.