However, instead of tightening the money supply to lower inflation, the government keeps printing more money to pay for spending. Once consumers realize what is happening, they expect inflation. This causes them to buy more now to avoid paying a higher price later. This boosts demand, causing inflation to spiral out of control. The only winners in hyperinflation are those who borrowed before the hyperinflation. They find that higher prices makes their debt worth less by comparison, until it is virtually wiped out.
Hyperinflation in GermanyThe most well-known example of hyperinflation was during the Weimar Republic in Germany in the 1920s. First, the German government printed money to pay for World War I. From 1913 to the end of the war, the number of deutschmarks in circulation went from 13 billion to 60 billion. The government also printed government bonds, which has the same effect as printing cash. Germany's sovereign debt went from 5 billion to 100 billion marks. At first, this fiscal stimulus lowered the cost of exports, and increased economic growth.
However, when the war ended, Germany was saddled with another 132 billion marks in war reparations. Production collapsed, leading to a shortage of goods, especially food. Because there was so much excess cash in circulation, and so few goods, the price of everyday items doubled every 3.7 days. The inflation rate was 20.9% -- per day! Farmers and others who produced goods did well, but most people either lived in abject poverty or left the country.(Source: der Spiegel, Germany in the Era of Hyperinflation, August 14, 2009)
Zimbabwe HyperinflationThe most recent example was Zimbabwe hyperinflation, which occurred from 2004-2009. The government printed money to pay for war in the Congo.
In addition, droughts and farm confiscation restricted the supply of food and other locally produced goods. As a result, hyperinflation was worse than in Germany. The inflation rate was 98% a day, and prices doubled every 24 hours. The only way it ended was when people started accepting other currencies instead of the Zimbabwe dollar. (Source: Cato Institute, Zimbabwe Inflation,
Hyperinflation in AmericaThe only time the U.S. suffered hyperinflation was during the Civil War. The Confederate Government printed money to pay for the war. If hyperinflation were to occur in the U.S., it would be measured by the Consumer Price Index (CPI). If you check out the current inflation rate, you will see that the U.S. is nowhere near hyperinflation. In fact, inflation isn't even in the double digits.
The U.S. won't suffer hyperinflation because of the Federal Reserve. Its primary job is to control inflation while avoiding recession. It does this by tightening or relaxing the money supply, which is the amount of money allowed into the market. Tightening the money supply reduces the risk of inflation, while relaxing controls on the money supply increases the risk of inflation.
The Fed has an inflation target of 2% per year in the core inflation rate. This leaves out volatile oil prices and gas prices, which move up and down rapidly depending on commodities trading. This can drive up the price of food, which is usually transported long distances. For this reason, the price of food is also left out of the core inflation rate.
If the core inflation rate exceeds 2%, the Fed will raise the Fed funds rate, and use other tools at its disposal to tighten them money supply, and lower prices again. Some experts say that the Fed's interventions to lessen the recession will cause hyperinflation. That is not a real threat, since most of the funds the Fed pumped into the banking system is sitting in bank reserves. It has not gone into circulation, and so cannot cause hyperinflation. If the banks start to lend too much, the Fed can easily raise its reserve requirement, and lower the money supply. To understand more about this, see Fed Interventions in the Banking Crisis