Thursday, July 19, 2012

Real threat of a hyperinflation

If people start losing confidence in the future purchase power of money, they tend to switch to real assets. This causes increases in asset prices. In other words, the purchasing power of money declines. Noticing such a trend, other cash holders may also panic and flock towards real assets. When such a self-reinforcing cycle sets in, it leads to hyperinflation. It must be noted that hyperinflation is not really a very rare event. It has struck various economies in the last century. Some remarkable instances would be Germany in the 1920s, Hungary after World War II and more recently Zimbabwe in 2008.  

What are the usual conditions before an economy is hit by hyperinflation? As per an article in Zerohedge, one condition is government deficits in excess of 20% of government expenditures. Which are the countries that make it to this notorious list? The five countries that make it to this list are none other than India, the US, the UK, Japan and Spain. But Japan seems to be at relatively lesser risk given that it is a creditor nation and not a debtor nation. Even Spain, which is part of the Eurozone, cannot trigger a hyperinflation on its own because it doesn't have its own individual currency. So the only prospective hyperinflation candidates are India, the US and the UK. Where disaster strikes first is for everyone to wait and watch.

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