It’s been two years since central banks issued trillions in fiat currency in response to a global pandemic, and now another destructive force has reared its ugly head: inflation. Today, the U. S. is grappling with its highest inflation reading in decades, and many of us — especially younger generations — are getting a crash course in economics as prices continue to rise. It’s natural to wonder if the future will become even more extreme with a hyperinflationary collapse. Hyperinflation can be scary for those who haven’t experienced it before. Luckily for us, there are some parallels, both historical and in the present day, that can help us prepare and weather the storm if it comes. What’s Hyperinflation? Inflation is an overall rise in prices. It has more or less been accepted as inevitable with fiat currency, and central banks have normalized inflation to some degree. Hyperinflation is runaway inflation with a sense of panic. Often, some external event occurs, such as war, uprising, or a global pandemic. A government will fund its crisis response with debt it can’t reasonably service, and print more money to cover the difference. Prices rise parabolically, which prompts consumers to panic-buy anything that will hold value and thus create massive shortages. Governments print more money to try and counter the effects, and it all becomes a vicious cycle. What constitutes hyperinflation is subjective, but economists tend to favor Phillip Cagan’s definition of a monthly price increase of at least 50%. In fact, there have been some instances that far surpassed that figure. In Zimbabwe during 2007-2008, prices doubled in about a day, according to the Cato Institute. Recently, hyperinflation has been observed in Lebanon and Venezuela, which both offer clues on how hyperinflation could play out in your area. Seek Stores of Value ASAPWhen hyperinflation hits, you are incentivized to spend your devaluing currency into anything that is a better store of value. In extreme cases where prices are doubling in a matter of days, almost anything non-perishable becomes a store of value. For example, it’s probably better to buy a couch and store your value in it than in the currency. Writ large, hyperinflation means the deterioration of market economies because time preferences surge. Each consumer is incentivized to spend their money as soon as they receive it. Often, people will look to swap the currency for another nation’s currency, but this can become untenable. Once the government catches on, capital controls can be implemented. Forex trading could be made illegal, or at least less advantageous, in an effort to prop up the failing currency. Most recently, Russia imposed a 30% tax on foreign currency purchases. We’ve even seen “smoke and mirrors” currency swaps where a nation redeems the currently issued currency for an even more devalued version. Bitcoin is one alternative that could prove to be useful in hyperinflation.
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How To Prepare For Hyperinflation
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