Fiat Currencies and Hyperinflation

Fiat currencies and hyperinflation are closely related by cause and effect.

When a government moves to a fiat currency that is backed only by government decree there is a great temptation that occurs for most politicians to spend wildly.

Like drunken sailors they encourage the rolling of printing presses to pay for huge public works projects, entitlement programs, funding wars, political luxuries and other extravagances.

These are frequently unpopular with the tax paying public, but creates greater power for the government politicians.

This incredible spending power eventually leads to huge debts.

This occurs without inflicting major taxes on their citizens. And for awhile, there is a sense of prosperity.

However an insidious inflation is always lurking in the background. When left unchecked, inflation can lead to hyperinflation which is a serious economic problem. This has happened many times throughout history. Let’s explore further.

First let’s explore the Fiat Currency part of Fiat Currencies and Hyperinflation:


Fiat Currency/Money
Fiat money has no intrinsic value. It is money (usually paper, or coinage) that has no commodity backing. It acquires its value from government decree that it is legal tender. In other words the only reason it is valuable is because people trust in their government.

The primary concern that the advocates of a commodity money system have is that fiat money can become valueless if the populous loses faith in the government. There is compelling evidence to support this position since this has occurred many times throughout history.

To see evidence of this, take a trip to a local coin shop and ask to see fiat currency (and coins) from around the world that has lost all of their value (except for novelty, or collectors value) due to defunct governments, hyperinflation, redenomination etc. It is common to see bins of worthless coins, and boxes of worthless fiat currency.

Next, let’s explore the hyperinflation part of Fiat Currencies and Hyperinflation.

Hyperinflation
Hyperinflation is inflation that is high, or out of control. It can be 26% a year or more. Runaway inflation can be as high as 50% per month or more. 5% - 10% or more hyperinflation per day has occurred.

This can be devastating for anyone who holds the majority of their assets in that countries currency. A large net worth can go to almost zero in a relatively short period of time.

Hyperinflation occurs when there is an unchecked increase in money supply. This is usually accompanied by a widespread unwillingness on the part of the population to hold the hyper inflated money any longer than to purchase goods or services, before the value of the money decreases any further.

Hyperinflation is usually associated with an unstable Fiat Currency. It usually occurs:

• During the aftermath of a war where huge quantities of Fiat Money are printed in large quantities to finance that war (or wars). The large quantities of money being pumped into the system can lead to hyperinflation.

• When there are large quantities of Fiat Money are printed for large public works projects, entitlement programs, political luxuries and other extravagances.

• Political or social upheavals that cause a dramatic loss of confidence in the government and the Fiat Money.

• When there is an aggressive bidding on currency exchanges that causes a countries’ Fiat Money to significantly loose its value.


The Ravages of Hyperinflation

Out of control hyperinflation can render a money supply obsolete.

For example during the early 1920s after World War 1 the German Weimer Republic government had no goods to trade and their gold reserves had been depleted paying war reparations.

The government cranked up the printing presses to deal with the crisis. Hyperinflation occurred because of the worthless paper money that the government was printed to help the formally great industrialists to pay back their loans.

The bank notes were printed to a thousand times their normal value. The value of the Papiermark declined from 4.2 per U.S. dollar from the beginning of WW1 TO 1 Million to one by August of 1923. The German Papiermark was essentially worthless.

There are many more examples throughout history where Fiat Currencies and Hyperinflation have wrecked havoc on a country.


Final Thoughts on Fiat Currencies and Hyperinflation
All of the civilized countries (including the United States) currently use Fiat Money. This is of considerable concern to many people and to serious economists (especially those from those who prescribe to the Austrian school of economics--who believe in a commodity backed monetary system).

Even more concerning are the herculean debts in the US and around the world. The size and continual increase in these debts is creating serious economic issues.

There is a significant possibility that these issues may create hyperinflation some time in the future for some, if not many of the countries around the world.

The damage to ones net worth can be devastating for individuals in these countries if their countries’ currency goes into hyperinflation. This is another reason why wise Financial Planning and Wealth Management are so important.

Also, critical thinking, problem solving and decision making are important skills needed to make good financial decisions.

If you need assistance in these areas please see the sister site that was created to help strengthen these skills.
It is called: Problem Solving Techniques.

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