Rule #1 Finance Blog

With Investor Phil Town

Hyperinflation: What is It & Can We Predict It?

Let’s talk about inflation. 

If you’ve recently heard this word come up in conversation a lot, it’s no surprise.

Over the course of the last few years, the U.S. has experienced a rapid rise in inflation, which has left many of us questioning important investment decisions.

However, I’m here to tell you that you can—and should—continue to be an active investor. The COVID-19 outbreak taught us how to invest during a pandemic and be successful in doing so. For every market fluctuation brought on by the coronavirus, we found ways to adapt and adopt the right buying strategies.

And, although the price of goods and services has continued to rapidly increase month over month, which can lead to hyperinflation​​—a more rapid and unrestrained type of inflation—there are ways to control this type of inflation before it leads to economic downfall.

Learn How to Protect Your Investments with a Proven Strategy

Save Your Seat at the Transformational Investing Webinar

What is Hyperinflation? 

Many of us haven’t heard much about hyperinflation since the 1970s and don’t know much about it beyond the fact that it’s a word we don’t want to hear.

If inflation is a devaluing of a currency’s buying power, hyperinflation is an extreme devaluing of a currency’s buying power.

Think of hyperinflation as an economic pandemic that wreaks havoc on the financial system of a country and its citizens. Hyperinflation is present when inflation rises to at or above 50% in a month.

Hyperinflation-Definition

This is problematic for a number of reasons. One of the bigger reasons has happened in the last year or so. The GDP in the United States sits at about $20 trillion. The government printed about $10 trillion in the last year. Because 50% of this money wasn’t even available before, prices went up, creating more scarcity for the people looking to purchase them.

So coming back to our original answer for the question “what is hyperinflation?”

Hyperinflation is definitely not a word you want to hear or experience.

Types of Inflation

Let’s talk about the main types of inflation, aside from hyperinflation.

Creeping Inflation

Creeping inflation is the mildest form of inflation and usually ranges between rates of 3% or less per year. 

This kind of inflation is most beneficial as it makes consumers believe that prices for goods (and the value they have) will continue to rise. 

This mentality boosts demand for specific items and can also lead to economic growth.

Walking Inflation

Walking inflation sits around a rate of 3-10% a year. Though this does not seem like much, this type of fast economic growth can be quite destructive. 

When inflation reaches this phase, people tend to panic and stock up on goods in order to avoid having to pay more for them in the future when the price increases. Because of this, the supply for certain goods is decimated and buying demand increases even more. 

Walking inflation also creates problems for consumers because many common items see prices rise so high that they are no longer available at a reasonable cost.

Galloping Inflation

Inflation rates that rise to 10% or more are known as galloping inflation. Rates this high do a significant amount of damage to the economy. 

When an economy reaches this level of inflation, it becomes extremely volatile. Money loses its value so rapidly that businesses and employees are left unable to meet financial demands.

Hyperinflation-DrasticallyDecreases

What Causes Hyperinflation? 

As mentioned, hyperinflation is a rapid type of inflation where prices can rise 50% or more within a month. It can be referred to as “permanent inflation.” 

Even though it is considered to be rare, it can be seen in instances where a government prints excess money in order to pay off various debts and expenses.

To figure out what causes hyperinflation, we must examine the two main causes of inflation: An increase in money supply and a demand-pull imbalance. 

In many cases, the two work hand-in-hand to create the perfect economic storm.

Increase in Money Supply

To pay for its large amount of spending, the government will print extra money to cover additional expenses. This can happen during times of crisis as a way to support citizens. 

Remember the stimulus checks printed during the height of the COVID-19 pandemic?

The problem with this approach is that printing more money doesn’t come without consequences. When the money supply increases, prices rise and inflation is born! 

And the more money that is printed, the closer we move toward this transitory model of inflation, called hyperinflation. This is dangerous because it can lead to a devaluation of the U.S. dollar.

Demand-Pull

Another one of the reasons for inflation stems from a demand-pull imbalance within an economy. 

When increased consumer demand for specific goods and services exceeds the current supply of those goods and services, demand-pull occurs. This surge in demand, when combined with the scarcity of these goods and services, drives market prices up.

Demand-pull inflation is commonly seen among growing economies.

Effects of Hyperinflation

One of the most noteworthy effects of hyperinflation has to do with the devaluation of the U.S. currency. Since 1935, the U.S. dollar has lost over 96% of its value. Plus, compared to a group of other countries, the U.S. dollar devalued by 12% in 2020.

Let that sink in.

And, this reduction in the buying power of the U.S. dollar doesn’t just impact Americans. It affects everyone. For the first time in a long time, China did not devalue its currency to match the U.S., indicating that it may be easing up on its reliance on the U.S. market.

Within the U.S., the effects of hyperinflation can lead people to hoard money in order to avoid having to pay more as supplies become scarce and prices rise. This pattern, if not controlled, can lead to economic downfall.

Hyperinflation-ValueUSDolla

Impacting Your Retirement

While finding ways to save money may seem valuable, the truth is hyperinflation renders cash savings worthless. Because of this, you may need to reevaluate your plans for the future to determine how the effects of inflation will impact your retirement. 

To determine how much money you’ll actually need to save before you retire, you’ll need to account for inflation (and my retirement calculator can help you do that). 

Once you find out how much money inflation is stealing from you, you’ll be equipped with the information you need to create a more comprehensive plan for your financial future.

However, the solution to all of these issues is not printing more money. The more money the government prints, the more fuel there will be to fan the hyperinflation flames.

Can We Predict Hyperinflation?

After the past few years of the pandemic, it’s easy to see how inflation affects stocks. 

Inflation and the stock market are tightly intertwined, and the stock market can be the biggest beneficiary of inflation in its early stages. So much so that inflation appears to be a good thing.

The massive devaluation of the U.S. currency is responsible for driving the current rise in inflation. In fact, the U.S. printed 35% of all the money that’s ever been printed in the country’s history last year. 

This is known as the M1 money supply—which is the spending money found in your checking accounts, savings accounts, under your mattress, and lying around at home.

Hyperinflation can be hard to predict, but based on the current trajectory, many people anticipate the U.S. could head in the direction of another economic depression if the government continues to rapidly print more money as a response to its growing debt.

The only factors that have prevented this downturn from occurring sooner are the actions of U.S. trading partners. All of these countries have taken the necessary steps to devalue their own currency in lockstep with the U.S. This allows them to continue to sell U.S. citizens their products at a price point that U.S. consumers can afford to pay.

How to Protect Yourself from Inflation

The best thing we can do to stay on our financial course is to try to slowly soften the blow from the effects of hyperinflation to work our way out of it.

To do this, assets are essential. Though you may feel cash is less risky, it is bad for inflation. So don’t be sitting on cash. 

Right now, the best thing you can do is focus on your assets. By doing your research, you can determine which wonderful companies to invest in at half the price. 

So, find stocks on sale and start there. Though it can be difficult to discover wonderful companies, once you find one to invest in, your investment will always be worth it.

If you want to learn more about the current stock market and inflation’s impact on its future, check out our Webinar & learn how you can protect your investments when the market takes a turn with my New Stock Market Guide.

Survival Guide