Hyperinflation is defined by inflation that exceeds 50% per month. The difficult challenges that lead a nation to hyperinflation begin when it starts using inflation to solve its economic problems.
The reason is that inflation creates the need for more inflation, and once a nation starts using inflation to solve its economic problems it is much more difficult to stop using it then it was before.
Inflation creates the illusion of solving economic problems, but a short time after, it creates much larger problems then first encountered. The temptation is to create more inflation to overcome the second wave of economic problems, but they of course lead to a third wave of economic problems that are much larger than the second.
Stopping the cycle of inflation is very difficult to face because it results in immediate economic hardship that results in ending political careers as the public anger is directed at the leadership.
Therefore the easiest path for any government to take is to keep increasing the inflation. Inflation also has many short-term benefits to the government making the decision not to inflate even more difficult.
The only way to stop the cycle of inflation is to elect leaders that understand the free market and how desperate sound money is to stop the looming disaster. This usually cannot be done until the results of inflation, which are higher prices, have educated the public enough for them to wise up.
The problem is that there is a delayed respond from the time inflation is created to the time it is reflected in higher prices. So by the time inflation is reflected in higher prices, the government has already reached the third wave, guaranteeing much higher prices for years to come.
The last time our nation struggled with inflation was in the 70’ and early 80’. When Fed Chairman Paul Volker started fighting inflation the consumer price index (CPI), which is the measure of prices, was only 4.7%. Yet the CPI continued to increase to 13.3% before it reversed - all the while the Fed was drastically raising interest rates to reduce the currency supply.
Since then, economic globalization has added a new wild card that has helped keep prices down, allowing the U.S. to continue creating inflation well into the third and fourth wave. I described this wild card as ‘vendor financing’ in a previous article.
This wild card has allowed the U.S. to move much further down the path of hyperinflation than would normally have occurred and therefore has drastically increased the likelihood of the U.S. experiencing hyperinflation.
In the next part of this article series I'm going to talk about how inflation gives the illusion of creating wealth, but it actually results in a reduction of wealth.
Part 1: Why is Inflation So Hard to Stop and So Easy to Start?
Part 2: How Inflation Gives the Illusion of Creating Wealth
Part 3: How to Break the Cycle before Getting to Hyperinflation