Tuesday, July 14, 2009


In economics, hyperinflation is inflation that is very high or out of control, a condition in which prices increase rapidly as a currency loses its value. The general population prefers to keep its wealth in non-monetary assets or in a foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power.

The general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that foreign currency. Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short.

Hyperinflation is generally associated with paper money because this can easily be used to increase the money supply add more zeros to the plates and print, or even stamp old notes with new numbers. In economic theory that is the confidence that there is a store of value which the currency will be able to command later.

Hyperinflation effectively wipes out the purchasing power of private and public savings, distorts the economy in favor of extreme consumption and makes the afflicted area anathema to investment. Hyperinflation is met with drastic remedies, such as imposing the shock therapy of slashing government expenditures or altering the currency basis.

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